Gold Begins Volatile, Pre-Fed Week With a Dip

By Barani Krishnan

AiVIF.com -- It’s the final 72 hours before the Federal Reserve’s decision on July rates and gold is behaving as most expect: predictably choppy.

Benchmark gold futures for August delivery on New York’s Comex settled down $8.30, or 0.5%, at $1,719.10 an ounce, after a session low of 1,712.95 and high at $1,734.30.

Fund flows into bullion have risen after last week’s first positive close in six, despite a plunge to 16-month lows of under $1,681 just before that.

Yet, some weren’t entirely convinced that the yellow metal was insulated from another drop into sub-$1,700 territory.

Gold traders were trying to determine if a recovery was indeed underway, Craig Erlam, analyst at online trading platform OANDA, said, noting that pivotal 10-year U.S. yields were encouragingly below the key 3% level.

“We may have to wait for the Fed on Wednesday, to see which of the two it's going to be, with the recessionary implications of its actions key to the outcome,” Erlam added.

Gold is supposed to be a hedge against inflation but it has not been able to hold up to that billing for most of the past two years since hitting record highs above $2,100 in August 2020. One reason for that has been the rallying dollar, which is up 11% this year after a 6% gain in 2021.

Comex’s August gold rose 1.4% last week, but only after a previous five-week tumble that cost bulls in the game a total of $172 or 9%.

The Dollar Index, which pits the greenback against six major currencies, fell for the third straight day on Monday, hovering under 106.5, after hitting a two-decade high of 109.14 on July 14.

Volatility could be the game for gold and other commodities this week as the Fed prepares to hit markets with its fourth rate hike of the year. Traders will also attempt to read the tea leaves on the economy from central bank chairman Jerome Powell’s news conference scheduled after the rates decision by the Federal Open Market Committee.

Forecasters’ overwhelming consensus — almost 80% — is that there’ll be another 75-basis point hike for July, just like in June. If so, that will bring rates to a range of 2.25-2.50% by the end of this month, from the 0-0.25% they stood at in February before the increases.

With three more rate decisions left for this year, Fed officials are indicating a high end of 3.5% or even 4% for rates by the year-end.

But money market traders are also pricing in rate cuts by 2023 if economic fallout from the Fed hikes turns out to be too great. This comes after bets rose to as high as 70% last week for a record 100-basis point hike in July.

That the market is even contemplating rate cuts by next year tells economists that the risk of a Fed-induced recession between now and then is reasonably high.

The U.S. economy has already contracted 1.6% in the first quarter and a second quarter in the red is all that’s needed to technically call a recession. The first reading for Q2 GDP data will be on Thursday, a day after the Fed rate decision.