Gold futures are plunging at the mid-session, testing their lowest level since April 30 in the process, while putting the market in a position to post its biggest weekly loss in weeks. The catalyst behind the move is the Fed’s signal that it might raise interest rates at a much faster pace than assumed.
At 16:25 GMT, August Comex gold is trading $1772.70, down $39.90 or -2.20%.
Fed Turns Hawkish
Bond yields and the dollar rose sharply on the surprise news from the Fed, reducing foreign demand for gold and its dampening its investment appeal.
On Wednesday, the Fed raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, after its two-day policy meeting concluded on Wednesday afternoon. However, the post-meeting statement reiterated the Fed’s view that inflationary pressures were “transitory.”
The Fed also indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.
With the Fed apparently taking a bit of a more hawkish turn, traders now anticipate good economic data to have a negative effect on gold prices. Increasingly confident in the U.S. economy recovery, the Fed is seen most likely launching its tapering of its $120 billion-a-month asset purchase program in January, according to a Reuters poll.
The Fed on Wednesday also signaled it would now be considering whether to taper those purchases meeting by meeting, and downgraded the risk from the pandemic given progress with vaccinations.
Going into the close, gold traders have to be aware of the possibility of volatility or a counter-trend rebound. One reason for a late session reversal is that gold is currently testing the 50% to 61.8% retracement area of the March 8 to June 1 rally. Trader reaction to $1798.80 to $1770.40 will set the tone into the close.
A drop in Treasury yields or a dip in the U.S. Dollar could stop the selling also. The key 10-year Treasury yield dipped Thursday as investors digested the Federal Reserve’s policy update and a big sell-off in commodities.
The yield on the benchmark 10-year Treasury note fell 8 basis points to 1.49%. The yield on the 30-year Treasury bond dropped 13 basis points to 2.07%.
Gold could bounce off its low or the Fib level at $1770.40 is yields continue to dip or the dollar breaks from its intraday against a basket of currencies.