Gold futures moved sharply lower Tuesday after remarks by Federal Reserve Chair Jerome Powell left the door open to more aggressive interest rate hikes as the central bank continues its battle to rein in inflation.
Price action
-
Gold for April delivery
GCJ23,
-1.60%
fell $29, or 1.6%, to $1,825.50 an ounce on Comex. -
May silver
SIK23,
-3.79%
fell 77.5 cents, or 3.7%, to $20.36 an ounce. -
April platinum
PLJ23,
-4.33%
was down 4.5%, at $934.80 an ounce, while June palladium
PAM23,
-3.26%
shed 3.9% to $1,368.50 an ounce. -
April copper
HGJ23,
-2.42%
declined 2.3% to $3.993 a pound.
Market drivers
Gold moved sharply lower following the release of Powell’s prepared testimony for the Senate Banking Committee on Tuesday.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.
Powell’s comment is not really surprising for those who follow the Fed and its impact on interest rates, gold and the U.S. market, Jeff Wright, chief investment officer at Wolfpack Capital, told MarketWatch.
Gold is “heading lower based on distinct possibility of increasing the pace of future interest rate hikes, sharper and longer,” he said, adding that the possibility of a 50 basis point increase for March is much higher now than before.
Depending upon Powell’s live testimony, “gold falling to $1,800 could be possible very quickly,” Wright said. There’s “not a lot of support for gold at the moment.” It’s very much a “wait and see session at the moment.”
Powell is also scheduled to appear before a House panel on Wednesday at 10 a.m. Eastern.
The Fed ratcheted up rates rapidly since March of last year. Over the past month, investors who had previously doubted the Fed’s forecast for a peak in the fed-funds rate above 5% changed their tune, while also largely pricing out expectations for rate cuts by year-end.
Treasury yields had retreated early in the year, while the U.S. dollar softened, allowing gold to rally. But those moves were reversed in February.
“The gold market’s focus remains squarely on the ebb and flow of monetary policy expectations, and the resulting movements in interest rates and the dollar,” said Peter Grant, senior metals analyst at Zaner Metals LLC and Tornado Precious Metals Solutions, in a note ahead of Powell’s testimony.
“However, if it becomes evident that rate hikes alone can’t contain inflation, gold may rally on flight to quality in anticipation of stubborn inflation and heightened risks of a recession,” he wrote.
Read: What stock-market investors want to hear when Fed’s Powell testifies before Congress this week
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On Tuesday, the precious metal gold dropped sharply after Federal Reserve Chairman Jerome Powell suggested that the central bank could take a more aggressive stance in raising interest rates.
Gold, which is considered to be a safe haven during market turmoil, dropped 0.8% to $1,297.80 an ounce after Powell made it clear that a more hawkish approach to monetary policy may be adopted in the near future. With his comments sending a strong signal that the Fed may raise interest rates faster and higher than expected, traders shed their gold holdings in favor of higher-yielding assets and commodities.
The U.S. Dollar Index, which measures the greenback against a basket of foreign currencies, touched a fresh three-year high and added to the pressure on gold. Gold-backed exchange traded products, such as the SPDR Gold Shares, also fell 0.7%, while silver and other precious metals prices fell as well.
In the wake of Powell’s remarks, the big question that remains for precious metals investors is how high the Fed will indeed raise rates. With the central bank still committed to a gradual approach to normalizing rates, and inflation currently running below the target rate of 2%, it is probably safe to say that the correction in gold prices could be short lived.
However, it is important to note that gold stocks, which can be more sensitive to central bank policy, could be vulnerable to further losses. With that in mind, investors should monitor their positions to ensure that the current market volatility does not pose an undue risk to their portfolios.
