Gold futures are inching lower on Tuesday after failing to follow through to the upside following yesterday’s potentially bullish technical reversal. The price action was likely fueled by short-covering due to oversold technical conditions. The fundamentals are still bearish, especially since traders aren’t sure where and when the Fed will stop raising interest rates.
At 06:51 GMT, April Comex gold futures are trading at $1822.30, down $2.60 or -0.14%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $168.97, up $0.62 or +0.37%. With gold headed for its most significant monthly loss since June 2021, traders fear there is more downside risk ahead in March as impending interest rate hikes by the U.S. Federal Reserve sapped the non-yielding asset’s investment appeal.
“The question is, ‘How much more to hawkish Fed repricing?’ and this highly depends on how U.S. data turns out and, in particular, if the disinflation trend can be more entrenched than bumpy,” said OCBC FX strategist Christopher Wong.
“A pause in hawkish Fed repricing could see USD momentum ease, supporting gold.” But he’s talking like a biased strategist. A weaker dollar will bring in some gold buyers because it is a dollar-denominated asset.
The real question is not ‘How much more to hawkish Fed repricing?’ but what should the inflation level be? Where does the unemployment rate have to be to convince the Fed to take a pause?
These are some significant unknowns. And when there is uncertainty, investors tend to sell. This is why we’re looking for further downside pressure. The market is only going as far as July, with 25-basis point rate hikes coming in March, May, and June. Furthermore, traders expect the Fed’s target rate to peak at 5.403% in September.
The way I see it unless the Fed decides to go big with 50-basis point rate hikes, gold could be under pressure for another 90 to 180 days. Even Fed Governor Phillip Jefferson sounded slightly uncertain on Monday when he said he was under “no illusion” that inflation would return quickly to the Fed’s 2% target and noted that the Personal Expenditures index remained “elevated.”
Although several unknowns drive the uncertainty, we know that the gold market and the Fed will remain data dependent and that traders are still in a “sell the rally” mode.