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Gold continues its steep decline as the Federal Reserve begins FOMC meeting

Commentaries & Views

As of 3:40 PM, EST gold futures basis the most active April 2022 Comex contract continues its steep decline currently down $43.50 or 2.22%, and is fixed at $1917.50. In the last two trading days, gold has declined approximately $71, trading to its lowest closing value in the last three weeks. After challenging the all-time high of $2088 last week, trading to an intraday high of approximately $2075, gold has lost over $150 from last week’s high to the current pricing.

A combination of factors has resulted in gold’s dramatic selloff. Today the Federal Reserve began this month’s FOMC meeting, which will conclude tomorrow and most certainly includes the first rate hike since the onset of the pandemic in 2020. While market participants are expecting the Fed to raise rates by ¼%, it will be the Fed statement and press conference by Chairman Powell that will be closely read and listened to in order to gauge the Federal Reserve’s overall tone.

Considering that inflationary levels are still at a 40 year high, the likelihood that the Federal Reserve will continue to tighten its accommodative monetary policy is extremely high. The Federal Reserve began to tighten its monetary policy by tapering its monthly asset purchases of mortgage-backed securities and U.S. debt. Before the tapering process, the Fed had been purchasing $120 billion of assets monthly. This consisted of $80 billion in U.S. bonds and $40 billion in mortgage-backed securities. The tapering process should be completed this month and was a necessary step before beginning interest rate normalization or “liftoff.”

According to the CME’s FedWatch tool, the probability that the Fed will raise rates by 25 basis points tomorrow is 96.3%. This is a slight decline from yesterday’s probability of 98.3% as market sentiment has resulted in a slightly higher probability that the Federal Reserve will be more aggressive and raise rates by 50 basis points or ½%. Currently, the FedWatch tool is predicting a probability of 3.7% that the Federal Reserve will announce a more aggressive rate hike tomorrow.

Russia continues its brutal campaign destroying military and civilian structures as its military moves closer to the capital city of Kyiv. However, there is some hope that the current negotiations between Russia and Ukraine will result in a cease-fire. However, with such a sharp divide between the goals of Ukraine and Russia, a peaceful resolution through negotiations will be extremely difficult if at all possible.

While inflation is still running extremely hot, the latest government report on wholesale prices rose 0.8% in February. The actual number came in below expectations of economists polled by the Wall Street Journal, who were forecasting a gain of 0.9%. Concurrently, crude oil prices continue to fall, closing below $100 per barrel. Crude oil futures are currently trading down $7.83 and fixed at $95.18 per barrel.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.