Gold Settles Below $2,000 Third Day in Row; Fed in Full Focus

© Reuters.

By Barani Krishnan

Investing.com -- Gold settled below $2,000 an ounce for a third day in a row on Tuesday, adding to its divergence from the key bullish mark as the Federal Reserve prepared to announce what could be the first pandemic-era U.S. rate hike.

The most-active gold futures contract on New York’s Comex, April, settled down $31.10, or 1.6%, at $1,929.70 an ounce. The benchmark gold futures contract last finished above $2,000 on March 10, when it finished at $2,000.40.

Prior to that, it hit a 19-month high of $2,078.80 on March 8 on the back of the geopolitical risk that followed Russia’s invasion of Ukraine. U.S. inflation readings running at 40-year highs had also boosted gold, seen as a hedge against both political and financial troubles.

But in Tuesday’s session, the benchmark gold futures contract fell to as low as $1,908.20, more than $170 or 8% from the March 8 peak — demonstrating the shift in market sentiment since, as international negotiators heightened their efforts to mediate in the Russia-Ukraine war.

Gold’s tumble in recent days was also hastened by concerns about the rate hike widely expected at the monthly meeting of the Fed’s policy-making Federal Open Market Committee, or FOMC, on Wednesday. The FOMC is forecast to raise interest rates by 25 basis points, or a quarter percentage point, after leaving them at virtually zero since the Covid-19 outbreak of March 2020.

Many economists say the hike will not be enough in an environment where the Consumer Price Index jumped 7.9% in the year to February. The central bank's own tolerance for inflation is just 2% per annum.

On top of a maximum of seven potential rate hikes this year — as per the number of FOMC calendar meetings — the Fed will also attempt to reduce its balance sheet, which now stands at $8.9 trillion after the central bank loaded up on Treasuries and mortgage-backed securities to support the economy since the Covid outbreak.

That action will reduce the cash in the financial system — but it will also bring uncertain consequences for bond and stock markets. Economists warn that if inflation doesn’t begin to subside in response to these initial moves, policymakers will end up raising rates too high, sending the economy into a recession and financial markets into a slump.

Some analysts think gold may yet have a shot at $2,000.

“The war in Ukraine does not look like it will have any immediate de-escalations and that should provide underlying support for gold prices,” said Craig Erlam, analyst at online trading platform OANDA. “If the FOMC decision shows some policy members are holding back some rate hikes on the dot plots, gold could get its groove back and make a climb back towards the $2000 level.”