Gold rally pauses with 2% drop as Fed Gov. signals more rate hikes

By Barani Krishnan

Investing.com -- When it looks too good to be true, it always is.

Gold bulls’ fantasy ride was cut short on Friday by a sudden ramp-up in the dollar, which ended with the yellow metal’s sharpest one-day loss in three weeks.

The change in the dollar’s fortunes came after Federal Reserve Governor Christopher Waller, one of the central bank’s biggest hawks on interest rates, said he desires more monetary tightening despite evidence that inflation in the United States was coming off four-decade highs. Higher rates benefit the dollar while gold, which is an insurance asset, does not yield anything.

Gold for June delivery on New York’s Comex settled at $2,015.80 an ounce, down $39.50, or 1.9%, on the day. The session low on June gold was $2,006.20.

The slump wiped out all of Thursday’s rounded-up gain of $30, or 1.5%, in June gold. It was the largest one-day decline in a front-month Comex gold contract since a 2.1% fall on March 31. For the current week, June gold finished down 0.5%.

The spot price of gold, more closely followed than futures by some traders, got to as low as $1,992.46 in the latest session.

Until Friday’s abrupt turn, gold bulls had one of their most euphoric runs in under a week, gaining more than $52, or 2.6%, in just three sessions between Monday’s close and Thursday’s settlement.

“Over the short-term, gold could remain very volatile in both directions here,” said Ed Moya, analyst at online trading platform OANDA.

Gold chartist Sunil Kumar Dixit concurred, saying the bias could be slightly more towards the negative after Friday’s action.

“The $55 drop from a $2,061 high leaves the daily settlement in gold with a potentially bearish engulfing formation, while weekly settlement makes an indecision Doji signal with a bearish bias,” said Dixit, who’s chief technical strategist at SKCharting.com.

Going into the week ahead, Dixit said there was a chance that Friday’s low of $1,992 on spot gold could extend to $1,981.

“Gold needs fresh triggers to make an advance towards $2,035 in order to restore its uptrend and retest the $2,061 target to make record highs above $2,079 and $2,089.”

Notwithstanding gold’s latest setback, Moya said there were enough reasons for investors to stay positive on the safe haven.

“Hawkish Fed comments raised the risk that the Fed could do more tightening beyond May and that rates might need to stay higher for longer,” he added. “In order for inflation to be conquered, we will need to see economic pain and that should support the bullish case for gold.”

The Fed has raised U.S. interest rates by 475 basis points over the past 13 months to fight inflation, taking them to a peak of 5% from just 0.25% after the COVID-19 outbreak in March 2020.

While it is still early to anticipate what the central bank will do at its next rate decision in May, some economists are pricing in another hike of 25 basis points based on the jobs growth for March — which came in at almost 240,000 versus the Fed’s desire for a growth of 100,000 or less.

Others think the Fed might actually call for a pause after the Consumer Price Index expanded at an annual rate of just 5% in March versus February’s 6%. In June, the so-called CPI was up 9.1% on the year, hitting a four-decade high. The Fed’s own appetite for inflation is just 2% per annum.

Earlier this week, data showed U.S. wholesale prices fell their most in nearly three years last month.

Then, on Friday, retail sales came in at their lowest in three months as persistent rate hikes and economic worries took a toll on the spending appetite of Americans.

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