Gold ends sharply lower as Fed’s Powell raises potential for bigger interest rate rises

“With the shock of inflation and war in Europe now long faded as a reason to buy gold, the precious metal currently lacks an urgent driver to flip investor sentiment positive in the face of further Fed hikes to come,” he said.

Gold ended 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.

The U.S. dollar strengthened in the wake of Powell’s remarks, with the ICE U.S. Dollar index
DXY,
-0.64%
up 1.2% at 105.58 in Tuesday dealings, pressuring dollar-denominated gold prices.

Precious metals prices slid on the back of the dollar’s strength, “as well as a reassessment of global demand in the wake of China’s setting of a lower-than-expected 2023 GDP target,” said Michael Hewson, chief market analyst at CMC Markets UK, adding that platinum, palladium and silver were all down heavily.

Depending upon Powell’s live testimony, “gold falling to $1,800 could be possible very quickly,” said Wright. 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 has ratcheted up interest 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.

BullionVault’s Ash, meanwhile, said gold bullion still managed to “shrug off last year’s steep rate hikes to set a fresh all-time record annual average at $1,800.”

That level “now looks pretty solid for curbing any pullbacks in gold thanks to the strong bid from Asia’s big jewelry markets and also from emerging-market central banks,” he said.