Gold futures are flat at the mid-session on Tuesday, mirroring the price action in the U.S. Dollar and Treasury yields as the Federal Reserve begins its two-day meeting. Helping to hold the precious metal in a tight trading range are fears over the possibility of the U.S. Federal Reserve hinting at an eventual cutting back of stimulus at its policy meeting.
At 15:25 GMT, August Comex gold is trading $1862.30, down $3.60 or -0.19%.
The tight trading range could lead to heightened volatility on Wednesday after the Fed releases its monetary policy decisions at 18:00 GMT. While the Fed is not expected to raise rates, the very mention of tapering its asset buying stimulus program or the possible timing of a rate hike could cause a volatile reaction. Tapering discussions or the presence of hawks at the meeting could drive gold prices sharply lower.
Ultimately, however, it depends on what the Fed comments do to Treasury yields and the U.S. Dollar. Yields have been steadily falling for weeks and last week hit a three-month low. Meanwhile, the dollar has remained firm as short-sellers liquidated positions. It’s very unusual to see them moving in opposite directions.
If Wednesday’s Fed announcements cause yields to rise along with the dollar then gold longs could suffer huge losses.
US Economic News
Producer prices jumped 0.8% for May, ahead of a Dow Jones estimate of 0.6%. On an annual basis, May’s Producer Price Index increased 6.6% – the largest 12-month increase on record since the data started in 2010.
Meanwhile, a separate report showed retail sales fell 1.3% in May, greater than the 0.6% dip economists had projected.
The Federal Open Market Committee’s (FOMC) two-day policy meeting is set to conclude on Wednesday afternoon, followed by a press conference with Fed Chairman Jerome Powell.
The Fed is not expected to take any policy action in its meeting, though investors will be listening to Powell’s comments closely for any signals of the central bank’s eventual asset purchase tapering plans.
Although nearly 60% of economists in a Reuters poll said a taper announcement will come next quarter, some gold traders are worried about an earlier than expected announcement at the June meeting. This is what’s keeping traders on the sidelines. They just don’t know if the Fed will be dovish or if a few hawks will step up at this meeting.