Metals Stocks

Jan. 27, 2022, 2:24 p.m. EST

Gold futures fall to a 3-week low as dollar surges after Fed points to start of rate hikes in March

By Myra P. Saefong and Mark DeCambre

Gold futures ended with a 2% loss on Thursday, as the U.S. dollar popped higher a day after the U.S. Federal Reserve signaled that it would soon be appropriate to raise interest rates as early as March.

Prices for the haven precious metal extended their decline after data Thursday revealed that the U.S. economy expanded at an annual 6.9% pace in the fourth quarter. Economists polled by The Wall Street Journal had forecast gross domestic product to rise by 5.5%.

“Gold sank after the upside surprise on Q4 GDP, which implies that the Fed will have even more leeway in tightening monetary policy,” Brien Lundin, editor of Gold Newsletter, told MarketWatch.

“Much of that GDP growth, however, was due to very significant inventory builds, and also largely reflects pre-omicron economic activity,” he said. “While Q1 2022 GDP growth is likely to moderate significantly for these reasons, the markets aren’t looking that far ahead.”

Lundin said he expects to see continued “volatility in the gold price until the Fed actually begins to hike rates in March,” adding that “history tells us that the metal’s price is weak before a tightening cycle, but rallies strongly once hikes actually begin.”

February gold (NYM:GC00) fell $36.60, or 2%, to settle at $1,793.10 an ounce, following a 1.2% decline on Wednesday. It was the first settlement below the key $1,800 mark for the most-active contract since Jan. 10 and the lowest finish since Jan. 6, according to Dow Jones Market Data. April gold , which is also among the most active contracts, settled at $1,795, down $37, or 2%.

Meanwhile, silver for March delivery settled $1.13, or nearly 4.8%, lower at $22.676 an ounce, after shedding 0.4% in the previous session.

“Speaking at the end of a two-day gathering, the Fed’s chairman gave clear indications of a commitment to tighten monetary policies to bring inflation under control, which led the markets to price in 200 basis points worth of rate hikes in 2022,” wrote Ricardo Evangelista, senior analyst at ActivTrades, in a Thursday note.

“Such a scenario is obviously supportive for the dollar and therefore penalizes gold, due to the inverted correlation between the two assets,” the analyst wrote. The U.S. dollar was up 1.1% on the session, as measured by the ICE U.S. Dollar Index (IFUS:DXY) , tapping a high of 97.268, its highest level since around July 2020.

Gold is priced in dollars and tends to fall as the U.S. currency rises, because a higher value for the buck can make buying bullion more expensive for overseas investors.

The currency market is more buoyant on the prospect of elevated rates.

Fed Chairman Jerome Powell at a Wednesda y news conference to discuss the central bank’s updated policy statement didn’t reject the notion it could increase interest rates at each of its meetings in 2022, and talked of the need to be “nimble.” Powell also said there was “quite a bit of room to raise rates without hurting jobs.”

That sets up a bearish scenario for nonyielding precious metals, with the prospect of rates extending their rise and competing against bullion for safe-haven demand.

Concerns about conflict in Western Russia, however, may limit declines for precious metals, which tend to rise amid heightened geopolitical risk.

A buildup of Russian troops at the border with Ukraine in recent months is threatening to devolve into a military clash that could ripple across parts of the globe.

In the near term, “with rising geopolitical risks and equity market stress, gold has begun to trade as a defensive asset class relative to equities,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

However, “our longer-term view is more cautious as higher interest rates will undermine gold demand as investors finally see higher yields in bonds, which challenges the value of a zero cash flow asset like gold,” he told MarketWatch in recent comments.

For now, other metals traded on Comex also declined, with the exception of palladium, which saw its most-active March contract climb by 0.7% to settle at $2,366.50 an ounce — the highest finish since early September.

Read: Palladium prices look poised to rise, with or without a Russian invasion of Ukraine

March copper fell 2% to $4.424 a pound and April platinum shed 2.3% to $1,021.80 an ounce

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