Gold Rate Slumps as Treasury Rates Rose in Advance of a Price Hike in the United States
Gold prices sank to a one-week low on Wednesday, as the possibility of rapid rate rises by the United States Federal Reserve pushed benchmark Treasury rates to two-year highs, decreasing the value of non-yielding Gold. After plunging to a one-week low of $1,805 per ounce on Tuesday, spot gold was down 0.2% at $1,810.90 per ounce as of 0352 GMT. Gold prices in the United States fell 0.1% to $1,810.80.
Gold had its best day in three months on Wednesday, as the dollar fell and geopolitical concerns in Ukraine boosted safe-haven appeal, causing valuable metals to rise. The United States Federal Reserve will constrict monetary policy far quicker than expected a month ago to combat persistently rising inflation, which analysts surveyed now see as the greatest threat to the U.S. economy in the coming year.
I.G. Markets analyst Kyle Rodda stated that Fed rate forecasts drive the gold market. Michael Hewson, the chief market analyst at CMC Markets U.K., said that if profits continue to rise, Gold is expected to fall back to $1,800 an ounce, but the metal is trapped in the same range as it has been for the past few months. He added that the $1,830 level appears impassable in the quick run, with additional advances in rates and the dollar expected to put downward pressure on gold prices.
According to DailyFX currency strategist Ilya Spivak, they appear to be setting up for a breakout, most likely on the downside, as the handoff occurs where inflation expectations start to slow down. At the same time, nominal rates shift up around pressures for central bank action, which starts to bid up real yields.
Although Gold is believed to be an inflation hedge, increasing interest rates tend to strain the precious metal. On Tuesday, benchmark U.S. Treasury rates hit two-year highs, while the dollar index scored its most significant daily rise in four weeks, making Gold more costly for holders of foreign currencies.
Traders anticipate a more aggressive tone from the Fed during its meeting on January 25-26, which is expected to address unrelenting inflation, which is at its highest level in over 40 years at 7%. Oil prices soared to a seven-year high as a pipeline outage from Iraq to Turkey raised supply fears amid troubling geopolitical difficulties in Russia and the United Arab Emirates, adding to inflationary pressures.
The Office for National Statistics reported that consumer price inflation in the United Kingdom increased more than predicted to 5.4% in December, up from 5.1% in November and the highest level since March 1992.
Spivak continued, it’s all too easy to look at the geopolitical context as something that people consider when evaluating Gold. But, on the other hand, Gold does not appear to be acting in this manner at the time. Instead, it seems to be solidly rooted in the Fed story.
Spot silver dipped by 0.2% to $23.41 per ounce, platinum dropped 0.8% to $973.64, and palladium fell 0.4% to $1,889.46. According to Citi Research, a global automotive production rebound is still on the cards, likely leading to a rise in palladium prices in 2022, albeit the recovery will be slow.