By Barani Krishnan
Investing.com - It’s held to the high $1,700s so far, riding the U.S. inflation wave.
Yet, the approach of what could be the year’s most important Fed meeting has started to weigh on gold.
U.S. gold futures’ most active contract, February, settled Tuesday’s trade down $16, or almost 1%, at $1,772.30 an ounce. Percentage-wise, it was the biggest one-day drop for the yellow metal in two weeks.
The Federal Reserve’s monthly two-day meeting begins on Tuesday with Chair Jerome Powell scheduled to brief on Wednesday of decisions taken by its policy-making Federal Open Market Committee.
Expectations are heavy that Powell will side with Fed colleagues who want to hurry along the taper of the central bank’s “forever-running” stimulus, by cutting as much as $30 billion a month instead of the previously-stated $15 billion. That way, the entire commitment to buy $120 billion worth of bonds and assets each month can be rolled away in a little over three months, and the first pandemic-era rate hike can happen by April.
But talk of a faster-than-expected rate hike has also saturated headlines for weeks now, leading many to think that any downward move for gold from a Fed acceleration of its stimulus might already be baked into the cake, so to speak.
Craig Erlam, analyst at online trading platform OANDA, noted that aside from Tuesday’s slide, gold “hasn't really progressed for a few weeks now although it has settled towards the upper end of its recent range which may be encouraging for gold bulls”.
“The Fed is still expected to accelerate its tapering this week but how gold reacts may well depend on how dovish the language around it is,” Erlam added.
News of rate hikes are almost always bad for gold. This time though, traders in bullion appear focused on the U.S. inflation story, allowing gold to play its traditional role as a hedge against that, although strong Fed action to right the situation could still be negative for the yellow metal.
The U.S. Consumer Price Index, or CPI, rose 6.8% in the year to November, growing at its fastest pace since 1982, just as it did in October, the Labor Department reported last week.
On Tuesday, it announced that U.S. producer prices jumped by a record 9.6% year-on-year last month.
The economy shrank by 3.5% for all of 2020 due to shutdowns and other disruptions caused by the Covid-19 crisis. Growth this year has been spotty, with an annualized 3.5% expansion in the first quarter, 3.6% in the second and 2.0% in the third.
The Fed announced in March that it expected a 6.5% economic expansion for all of 2021 and has not changed its target despite the uneven growth in the past three quarters. The problem for the central bank though is inflation running at near 40-year highs as prices of almost everything have soared from the lows of the pandemic due to higher wage demands and supply chain disruptions.