Gold Notches Unlikely Win as Fed Again Ratchets Up Rates

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By Barani Krishnan

AiVIF.com - Gold bulls feared the worst as the Federal Reserve headed for its much-anticipated third straight 75-basis point rate hike of the year.

Yet, it was all’s well that ended well for longs in the game who actually managed to see their first price gain in three sessions despite the central bank threatening more substantial rate hikes before the year is done.

The benchmark gold futures contract on New York’s Comex, December, settled up $4.60, or 0.3%, at $1,675.70 per ounce. The session high for the day was $1,696.65 — virtually hitting the $1,700 mark that gold bulls have aspired to return to since falling off that price point on Sept. 15.

The spot price of bullion, which is more closely followed than futures by some traders, was up $9.03, or 0.5%, at $1,673.84 by 16:35 Eastern U.S. Time (20:35 Greenwich Mean Time). Spot gold’s peak for the day was $1,688.06.

“The hawkish Fed projections are a rather grim outlook for the economy and that could eventually trigger a resumption of a safe-haven role for gold,” said Ed Moya, analyst at online trading platform OANDA. “The Fed acknowledged that we’re at the very lowest levels of what is restrictive and that they are prepared to soften this labor market. This inflation fight is going to get ugly for the economy, but right now it seems the Fed will be done hiking in February.”

“Gold will remain vulnerable to selling pressure if inflation does not continue to ease, but it could start to stabilize now.”

Sunil Kumar Dixit, technical chartist for gold at SKCharting.com, said gold could build towards $1,740 if it maintained its current momentum.

"Oversold conditions make gold vulnerable to fierce short covering if critical resistance zones are breached," said Dixit in an AiVIF.com outlook on gold published on Wednesday. "A sustained break above this zone puts the 50-Day Exponential Moving Average of $1,726 and the previous week's high of $1735 as a challenge."

U.S rate hikes have some ways to go before the Fed considers a pause or reduction, with the likelihood of another 125 basis points being added before the end of this year, Chairman Jerome Powell said Wednesday.

Powell's comments came after the FOMC announced a third straight 75-basis point rate hike since June. It was the fifth hike for the year that brought key lending rates to a peak of 3.25% from a mere 0.25% in February.

And the Fed isn’t alone with tightening though: Central banks in the United Kingdom to Switzerland are contemplating higher rates too this week. ​

An additional 1.25% in increases would bring U.S. rates to a peak of 4.5%. Asked if this would be “restrictive enough” for the Fed’s aim to discourage inflation, the central bank chief replied: “We'll be looking at a few things. First, we'll want to see growth continuing to run below trend, to see movements in the labor market showing a return to a better balance between supply and demand, and clear evidence that inflation is moving back down to 2%.”

To a related question, Powell said, “clearly, today we're just moved into the very lowest level of what might be restrictive.”

He warned of job losses and cuts in wage gains as the Fed embarked on fighting inflation, which was its main game.

“We can't fail to do that,” he said, referring to the central bank’s mission against price growth. “That would be the thing that would be most painful for the people that we serve. We have got to get inflation behind us. I wish there were a painless way to do that. There isn't. What we need to do is get rates up to the point where we're putting meaningful downward pressure on inflation. That's what we're doing. We haven't given up the idea that we can have a relatively modest increase in unemployment.”

As for the US economy itself, the Fed projected a Gross Domestic Product growth of 0.2% for all of this year and 1.2% for 2023. That would compare with the 2021 GDP growth of 5.7% as the United States recovered robustly from the business lockdowns associated with the pandemic from a year ago.

Economists have warned that the Fed could end up pushing the United States into a deep recession with its sharpest rate hikes in four decades, saying the high-flying housing sector and one-time ebullient stock market could end up as the Fed’s victims.

Powell acknowledged those concerns on Wednesday, saying he could not guarantee the U.S. economy will remain recession-free. Here’s where gold could see a prop as a safe-haven, as OANDA’s Moya suggests.

“We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging,” Powell said. “No one knows whether this process will lead to a recession or if so, how significant that recession would be.”

Preliminary estimates show that GDP likely contracted by 0.6% in the second quarter after a 1.6% slowdown in the first quarter. Two straight quarters of GDP growth typically places an economy in a recession.