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Gold: What Fed Rate Hike Of 50 Basis Points Or 75 Basis Points Could Mean

By Investing.com (Barani Krishnan/Investing.com)CommoditiesJun 15, 2022 04:33AM ET
www.investing.com/analysis/gold-what-fed-rate-hike-of-50-basis-points-or-75-basis-points-could-mean-200625798
Gold: What Fed Rate Hike Of 50 Basis Points Or 75 Basis Points Could Mean
By Investing.com (Barani Krishnan/Investing.com)   |  Jun 15, 2022 04:33AM ET
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The Federal Reserve’s largest rate hike in 28 years could be coming later today at 2 PM EST. The question is what will happen to the price of gold—an asset labeled as a hedge against inflation but that relationship has broken down lately due to the runaway strength in rivals, the dollar and US Treasury yields.

Gold Daily
Gold Daily

For decades, the Fed had typically used quarter percentage point rate increases to tame inflation. 

But the larger-than-expected 8.6% annualized sting in the Consumer Price Index for May means the Fed might have to resort to unusually strong medicine to curb price pressures that don’t seem to be slowing from four-decade highs.

Gold’s benchmark futures for August lost about $60 an ounce, or nearly 3.5%, on New York’s COMEX over the last two days on speculation that the central bank could resort to a rate hike unseen in decades. 

The Fed’s 25-basis point (bps) hike in March virtually accomplished nothing. The same could arguably be said of its follow-through 50 bps increase in May. 

Of course, if the Fed keeps adding 50 bps at each of its five remaining rate decisions for this year, it could take rates to as high as 3.5% by the year-end from a virtual zero in February.

But the Fed could do even more than 50 bps a month. That’s what investors are fearing and that’s what caused the S&P 500 to become a bear market—down 22% from its Jan 4. high of 4,819—in recent days. 

As of Tuesday, money market traders had priced in a 96.2% possibility of the Fed settling on a 75 bps hike at its June rate decision due on Wednesday. 

A tiny fraction—3.8%—was leaning toward a 100 bps increase; a proposition that seemed virtually impossible just a week earlier.

So, what will gold do if the central bank sticks to convention and does a 50 bps hike? The Fed has raised rates by half a percentage point a total of 44 times, mostly during the ’70s and early ’80s when it was chasing skyrocketing inflation. Since the early ’80s, such big moves occurred only 12 times.

And what could happen to gold in the event of a 75 bps or larger hike? A 75 bps hike or more has only occurred 28 times since the 1970s. The last time was in November 1994, when the Fed hiked rates multiple times in one year in a move to stave off inflation.

We explore the impact on gold from the two scenarios as presented by Sunil Kumar Dixit, chief technical strategist at skcharting.com.

Scenario A: 50 Basis Point Hike

If the Fed announces a 50 bps hike, gold can throw up a $30 - $50 move as an immediate reaction, taking the metal toward $1,850-$1,880.

Meanwhile, eventual volatility can cause a pullback of $20-$30 from there, for gold to back to $1,790-$1,780.

Scenario B: 75 Basis Point Hike

Gold can drop $30-$75 either in a straight go or in phases. 

We can expect a retest of the $1,800-$1,787 levels initially, followed by $1,755. If the sell-off escalates, even $1,730 will be possible.

Overriding Factors

Gold has been trading well below the 100-Day Simple Moving Average of $1,890 and the 50-Day Exponential Moving Average of $1,865 as well as the 200-Day SMA of $1,843

For a couple of weeks now, we have seen the metal being rejected at the $1,880 high, with prices dropping to $1,805 in Tuesday’s session.

This has created a $74 channel for a potential move in either direction after the Fed's decision. 

If gold manages to breakout above the multi-week resistance of $1,880 and gold bulls show enough buying resolve, prices can reach $1,895-$1,910. Any potential short-term bullish breakout rally has high chances to climax at $1,925-$1,935.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Gold: What Fed Rate Hike Of 50 Basis Points Or 75 Basis Points Could Mean
 

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Gold: What Fed Rate Hike Of 50 Basis Points Or 75 Basis Points Could Mean

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Comments (18)
Gian Maria Malmesi
Gian Maria Malmesi Jun 16, 2022 11:36AM ET
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@Barani Krishnan  Nobody can predict a future price, not me, neither you. Today's price action is here to demonstrate it. I am actually long Gold short WTI. I based my analysis on the historical positive correlation between the two assets that apparently "broke" in the last few weeks. Gold is also historically one of the best hedges to inflation and OIL historically depreciate when the economy slowdown, I believe what "broke" this correlation was an incredibly strong USD. Sooner or later macroeconomic factors adjust discrepancies
Teddy Indra K
Teddy Indra K Jun 16, 2022 7:24AM ET
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Impressive article
Teddy Indra K
Teddy Indra K Jun 16, 2022 7:24AM ET
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Impressive article
Shahid Aman
Shahid Aman Jun 16, 2022 3:30AM ET
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so what next is coming
Murali Krishna
Murali Krishna Jun 15, 2022 11:00PM ET
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Happy 75. Wishing you many more happy returns of the 75s.
Gian Maria Malmesi
Gian Maria Malmesi Jun 15, 2022 5:53PM ET
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Congrats, it actually happened the opposite. 0.75% rate hike and GOLD moved higher
Barani Krishnan
Barani Krishnan Jun 15, 2022 5:53PM ET
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Gold's intraday move was within the swing factor of $75 that Sunil mentioned under the overriding factors section of his technicals. Like all markets, it sometimes has the tendency to surprise and gold followed the alternative trade today, the same way the S&P did.  Powell's post-hike remarks about the lack of probability for super-sized hikes (read 1%), the retreating dollar and yields all made sense for the snapback.
Mr Mawi
Mr Mawi Jun 15, 2022 5:53PM ET
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You mentioned a drop (scenario B) of 30-75 dollars. Just admit that you were wrong.. thats sometimes better
Barani Krishnan
Barani Krishnan Jun 15, 2022 5:53PM ET
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Mr Mawi  Yes, that was not what happened (scenario B) because the market was oversold in the run-up to the 75 bps and you had a classic sell the rumor and buy the news development. I've no problems saying we were wrong in this instance but the fact remains that Sunil had that oversold element cited as well in his overriding factors. Of course, I can be wrong anytime as analyst can be. We aren't God, my friend, though I can sense the perverse thrill that you seem to take in "congratulating" me and Sunil for getting our primary directional call wrong. It's alright; we win some days, we lose on some. It's part of the game. It doesn't dissuade us from doing what we do and having many appreciative readers for that.
Murali Krishna
Murali Krishna Jun 15, 2022 2:21PM ET
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Happy 75. Wishing you many more happy 75s
Murali Krishna
Murali Krishna Jun 15, 2022 2:21PM ET
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Dixit is consistently wrong. He doesn't give up
Barani Krishnan
Barani Krishnan Jun 15, 2022 2:21PM ET
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It's you who won't give up with $640 gold gibberish Murali. Gold's intraday move was within the swing factor of $75 that Sunil mentioned under the overriding factors section of his technicals. Like all markets, it sometimes has the tendency to surprise and gold followed the alternative trade today, the same way the S&P did.
SunilKumar Dixit
SunilKumarDixit Jun 15, 2022 2:21PM ET
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Murali Krishna. You will be right only when Gold drops to your dream number $640 and until then you are a big time failure and wrong and stubbornly being a subject of ridicule. Come on, if you have nothing logical, do some meditation, it will help you heal.
Murali Krishna
Murali Krishna Jun 15, 2022 10:39AM ET
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The two Dixit scenarios must be interchanged. We will have gold dancing all the way to $640, one heck of long dance
SunilKumar Dixit
SunilKumarDixit Jun 15, 2022 10:39AM ET
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What ails you Murali Krishna? Readers here find your $640 no longer amusing and you have nothing logical to say. Grow up.
Tom Sc
Tom Sc Jun 15, 2022 10:39AM ET
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lol $640....not $650...$625...$640. when gold is $640 I guess the S&P is back to 1000? oil $25 a barrel? next level stu(pid)
John Whitfield
John Whitfield Jun 15, 2022 7:51AM ET
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no one going to mention the supply glut on gold that just came in from Uganda? this will factor on gold price too.
Barani Krishnan
Barani Krishnan Jun 15, 2022 7:51AM ET
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Well, Uganda said "recent exploration surveys" have shown it has gold ore deposits of about 31 million tonnes and it wants to attract big investors to develop the sector hitherto dominated by small wildcat miners. There will be an appreciable gestation period before all that gold finds it way to the market. Production itself is only expected to start later this year. This doesn't impact the price for now.
SunilKumar Dixit
SunilKumarDixit Jun 15, 2022 7:51AM ET
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News of Uganda too far fetched to call any immediate impact on prices.
 
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