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Rising Fed Rate-Hike Expectations Reduce Gold's Shine

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(Kitco News) - Financial markets are suddenly factoring in a higher probability of a U.S. interest-rate hike this month after recent comments from Federal Reserve officials, and this is thwarting gold's recent rally to three-month highs.

Comex April gold was down $11.60 to $1,242.30 as of 8:39 a.m. EST Wednesday. The contract peaked at $1,264.90 on Monday, which had been its strongest level since Nov. 11.
 
Gold was basically unable to generate upward momentum through chart resistance, and now Fed expectations are taking a toll, said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA.
 
"Yesterday evening, there was a lot of talk going around that there is a good possibility of a March rate hike," Nabavi said in an interview with Kitco News. "Monday, we were below a 50% chance. This morning, people are talking about a 70% to 80% chance of a rate hike."
 
Jonathan Butler, precious-metals strategist with Mitsubishi Corp., said remarks from New York Fed President William Dudley played a major role. Dudley, thought to be one of the more influential Fed members, said Tuesday that the argument to tighten monetary policy "has become a lot more compelling" since the election of U.S. President Donald Trump. TD Securities said Dudley's views "carry a bit more weight since he is a core part of the Fed," and they echo recent comments from other speakers, including Dallas Fed President Robert Kaplan, Philadelphia Fed President Patrick Harker and San Francisco Fed President John Williams. 
 
"The biggest gold-related move of the evening was in expectations of interest-rate rises, which went from a 50% probability of a March rate hike to an 80% chance, according to the Fed Funds futures market; this is essentially a gold-negative development," Butler said.

Market participants now will be looking for further guidance in a speech on the U.S. economic outlook Friday by Fed Chair Janet Yellen, analysts said.
 
"If Yellen's remarks also point to a rate hike in the near future, this will presumably cause the U.S. dollar to further appreciate and will weigh on the gold price," Commerzbank said.
 
Always-important monthly U.S. employment data are due out next week, with the ADP private-sector jobs report scheduled for March 8 and the Labor Department's report on nonfarm payrolls set for March 10.
 
Should these show further jobs growth, "this will strengthen the case to raise rates this month," Butler said. "Between now and the Fed's interest-rate decision on March 15th…the risks for gold are therefore to the downside as a rate hike gets priced in."
 
Nevertheless, for now, gold remains stuck within its recent trading range, Nabavi commented.
 
The differential between short-term U.S. and German government bond yields has hit its widest level since 2000. The higher U.S. yields favor the U.S. dollar, with the euro falling to $1.05215 from a Tuesday high of $1.06301. Gold tends to move inversely to the U.S. currency.
 
Analysts suggested the market moves - including the stronger U.S. dollar -- are influenced by Fed expectations more-so than a speech by Trump before a joint session of Congress on Tuesday night. In fact, several analysts suggested the Trump speech lacked details that investors were looking for, such as tax reform, infrastructure initiatives and deregulation.
 
"The gains in the U.S. dollar appear to be more a function of shifting expectations of Fed policy than new clarity on fiscal policy," Brown Brothers Harriman said in an early-day research note. "By Bloomberg's calculation, there is now an 82% chance the Fed hikes in two weeks. Our interpolation puts the odds at 74%. New York Fed President Dudley's remark that an increase in rates has become 'more compelling' was the catalyst."

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Silver Britannia