Gold prices settled with a loss Wednesday, at their lowest in about three weeks, then edged higher in electronic trading shortly after the Federal Reserve’s widely expected decision to raise a key interest rate for the third time this year.
The central bank on Wednesday raised its target for its benchmark lending rates to a range between 2% and 2.25% and signaled it was prepared to increase again in December, as it also altered language that could mean a slowing in the pace of future increases.
“The financial markets were expecting a 25 bps increase in the Fed Funds rate at the Wednesday meeting, and that had been pretty much already priced in,” said George Milling-Stanley, head of gold investment strategy at State Street Global Advisors. “That was a contributory factor in the softness in the gold price in recent weeks.”
“In the run-up to each of the previous seven rate hikes in the current cycle of interest rate normalization, which began back in December 2015, the trend has been for the dollar to strengthen on speculative demand, and for gold to weaken,” he said. And “in the days, weeks and sometimes months following the announcement of a small increase in rates, speculators have unwound these trades to take profits, selling the dollar and buying back short positions in gold.”
So “in the aftermath of a rate hike the dollar has softened and gold has gained ground,” said Milling-Stanley.
December gold GCZ8, -0.52% fell $6, or 0.5%, to settle at $1,199.10 an ounce. Prices for the most-active contract haven’t see a settlement that low since Sept. 4, according to FactSet data. In electronic trading shortly after the Fed announcement, the contract traded at $1,202.
The dollar index DXY, +0.10% traded nearly flat at 94.125 after the Fed news. It had traded between a high of 94.40 and low of 93.95.
Fed Chairman Jerome Powell was set to hold a news conference at 2:30 p.m. The market has penciled in a total four rate increases in 2018 and the FOMC statement suggests that that expectation will be met with one more rate increase in December rate hike.
See: the live blog and video of the Fed decision and Powell press conference
The “reaction of the dollar will be influenced to a large degree by the Fed’s forward guidance and whether there are any noticeable changes in the dot-plots,” said Fawad Razaqzada, technical analyst at Forex.com, in commentary emailed early Wednesday. The dot plot are the projections of each FOMC participant’s assessment of the appropriate midpoint of the target range for the federal-funds rate.
Read: Here’s how the Fed’s statement, dot plot and forecast may shift
Gold is sensitive to higher rates because they push up U.S. bond yields, reducing the attraction of nonyielding bullion, and tend to boost the dollar, which makes gold more expensive for buyers with other currencies. Gold prices based on the most-active contracts have declined by 8.3% so far in 2018 while the dollar index is up about 2.3%, both moves largely linked to a tightening Fed.
Meanwhile, December silver SIZ8, -0.61% lost 0.6% at $14.401 an ounce, while December copper HGZ8, -0.05% edged up by 0.2% to $2.828 a pound.
January platinum PLF9, +0.33% which is now the most active, added nearly 0.4% to $829.10 an ounce and December palladium PLZ8, +0.00% settled up 0.9% at $1,063.10 an ounce to settle at the highest for a most-active contract since January.
The popular SPDR Gold Trust GLD, -0.52% and the iShares Silver Trust SLV, -0.74% each fell by 0.3%. The VanEck Vectors Gold Miners ETF GDX, -2.15% lost 0.9%.
Providing critical information for the U.S. trading day. Subscribe to MarketWatch’s free Need to Know newsletter. Sign up here.