Gold prices fell on Tuesday as market participants await the Federal Reserve’s policy decision tomorrow. However, the yellow metal is on its way to third consecutive monthly earnings. Analysts interpret the market and share their forecasts.
Fed and China influence on gold prices
Spot gold fell 0.8% to $1,907.5 at press time. However, a monthly increase of over 4% is on its way. U.S. gold futures were trading at $1,922.5, down 0.86%. Meanwhile, the dollar index (DXY) remained stable but adjusted for the fourth consecutive monthly decline.
cryptocoin.com As you follow on , investors mostly expect the Fed to cut interest rates to 25 basis points (bps) by the end of Wednesday’s two-day policy meeting. The US central bank reduced the tightening rate to 50 basis points in December after four consecutive 75 basis points gains. Ajay Kedia, director of Kedia Commodities in Mumbai, comments:
Prices are trading in a narrow range ahead of the Fed meeting. The gold market has already priced in a 25 basis point increase. If the Fed dove hits a ton then it will be positive for gold. With the recovery of the Chinese economy, the demand for physical gold in China will improve. It will also support other precious metals of industrial nature.
“In this scenario, gold prices rise!”
Michael Langford, director of corporate consulting firm AirGuide, expects gold to trade between $1,900 and $1,925 next week. Daniel Pavilonis, senior market strategist at RJO Futures, states that the way the Fed tells this story will reflect on the gold market. In this context, Pavilonis makes the following statement:
The bigger picture here is that if the Fed slows rates, inflation comes roaring back. If the Fed stops for a bit and inflation is still there, I think gold will rise in this scenario.
‘Fed’s hawkish surprise could cause setback’
After US consumer spending, the Fed’s preferred indicator of inflation, fell for the second consecutive year in December, putting the economy on a slower growth path into 2023, expectations for a slowdown in rate hikes rose. However, the number of people applying for unemployment benefits continues to fall. This signals a tight labor market that could force the Fed to raise interest rates. Michael Hewson, chief market analyst at CMC Markets, predicts:
A hawkish surprise from the Fed could cause gold prices to fall to $1,900 in the short term.
“Powell doesn’t like the stock market continuing to rise”
Gold has risen 17.7% in the last three months and over one hundred 5% since the start of the year. However, when the Federal Open Market Committee (FOMC) meets on Tuesday to decide on a rate hike, gold is vulnerable to pullback as Fed Chairman Jerome Powell is poised to adopt hawkish rhetoric at his press briefing that day. This is the assessment of Adrian Day, President and CEO of Adrian Day Asset Management, a veteran of the financial industry and author of numerous books. Day continues his assessment as follows:
I think gold is vulnerable to a pullback as the market is very confident that there will be a 25bps gain and a pause in March. Powell doesn’t like that the stock market continues to rise. Which means the stock market doesn’t take him seriously… His motive is to come out and say something strong. And that means, ‘As the Fed, we’re going to keep this going. Keep doing this until inflation beats.
“Gold prices will go to record highs, but…”
Equity markets have really soared this year, with the S&P up 6 percent since the start of the year. Day warns that if Powell comes out with hawkish rhetoric and downplays the idea of a pause, it could temporarily lower the price of gold below $1,900. However, he predicts that gold will continue to rally in 2023, ‘exceeding’ previous all-time highs. He says it is in an ‘exceptional rise’ in gold. He explains his views on this matter as follows:
What is driving gold higher is interest rates rising, but the market believes the Fed will not continue to raise rates. I think gold will break its all-time high this year. There is little doubt about it.
But Day adds that if the Fed continues to raise interest rates above expectations, it will “derail” the gold market.
