Gold Hits February Lows on Tremors Over Fed’s Likely 50 bps Hike

© Reuters.

By Barani Krishnan

AiVIF.com -  The Federal Reserve is determined to break the back of the U.S. inflation. Whether it gets to do that or not, it’s certainly breaking the back of gold’s $1,900 support.

The yellow metal tumbled again on Monday after a two-day reprieve that took it higher, falling 2.5% this time as the Fed looked likely to impose a 50-basis, or half-percentage, point rate hike at the conclusion of its May policy meeting on Wednesday. It will be the first hike of such magnitude by the Fed in over 20 years and comes as the central bank seeks to quell U.S. inflation growing at its fastest pace in four decades.

Front-month gold futures for June on New York’s Comex settled at $1,863.60 per ounce, down $48.10 from Friday’s settlement of $1,911.70. Its low for the day was $1,853.95 during the session — a bottom since the week ended Feb. 11.

Gold tumbled as the dollar — its key rival and chief beneficiary of U.S. rate hikes — soared along with bond yields led by the U.S. 10-year Treasury note. The Dollar Index, which pits the greenback against six currency majors, rose to near the April peak of 103.95, which marked a 25-month high.  

The Dollar Index soared more 4.6% for April, its most since January 2015. Of the 20 trading sessions for last month, the index only declined in four — one of the most remarkable winning streaks ever for the greenback.

The outsize rally in the dollar came in anticipation of the higher rate regime the Federal Reserve was expected to adopt over the remainder of 2022 — and possibly 2023 — to get inflation down from around 8% a year to the central bank’s tolerance levels of just about 2%.

Just on April 18, June gold hit a six-week high of $2,003 on concerns that the United States could run into recession from aggressive Fed actions to control inflation. Gold typically acts as a hedge against economic and political fears.

A succession of Fed speakers had, however, soothed some market worries that the economy could be busted by the central bank’s actions — despite the first quarter of 2022 already registering a growth of minus 1.4% and another negative quarter was all that was needed for between April and June to fit into the technical definition of recession.

Focus on the Fed and inflation rather than the economy — at least for now — are what have turned against gold, say analysts.

Technical charts for spot gold indicate the yellow metal could plumb $1,818 on further weakness ahead of the Fed rate decision.

“A sustained move below $1870 may push spot gold down to the 50-week Exponential Moving Average of $1,850 and the 100-week Simple Moving Average of $1,837,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com. “If gold breaks below $1837, $1,818 will likely hold as support.”