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Gold price tumbles as markets eye Fed's inflation stance, tapering, and dot plot comments

Kitco News

(Kitco News) Gold saw another selloff ahead of the Federal Reserve monetary policy announcement on Wednesday, with prices approaching the $1,850 an ounce level.

Flows into gold have slowed after the precious metal failed to breach the $1,900 an ounce level despite higher-than-expected inflation numbers and a disappointing employment report out of the U.S. At the time of writing, August Comex gold futures were trading at $1,855.50, down 0.56% on the day.

All eyes are now on the Federal Reserve, with central bank Chair Jerome Powell scheduled to speak at 2:30 p.m. EST time on Wednesday following the June interest rate announcement.

The key interest rate statement comes at a time when the Fed seems to have convinced the markets that the jump in inflation will be transitory. But one of the key questions going forward will be how long can the central bank keep this up.

"We expect a hawkish hold stemming from a shift in the Dot Plots, upgraded economic forecasts, and potential tapering talk," said BBH's global head of currency strategy Win Thin.

On Wednesday, markets will get a much less dovish Fed than during the April meeting, with a tapering discussion likely to weigh on gold, according to analysts.

"Considering it is time to have the talk at this week's FOMC meeting, with Chair Powell set to announce that the Fed has started to discuss a progress-dependent tapering plan, the pullback could have further room to run as talk of taper talk pulls the speculative bid further," said TD Securities commodity strategists.

Markets will also be busy digesting the updated dot plot along with new economic projections, including the GDP outlook and inflation estimates. The last time these were updated was back in March, with the median GDP growth forecasts standing at 6.5% in 2021, 3.3% in 2022, and 2.2% in 2023. Meanwhile, the median core PCE projections were at 2.2% in 2021, 2.0% in 2022, and 2.1% in 2023.

"The main changes should be for inflation, not growth or the unemployment rate … Median projections for core inflation in 2022/2023 will probably rise slightly, consistent with a sizable revision to 2021 being viewed as 'largely reflecting transitory factors.' The median dot will probably show a rate hike by end-23," the TD Securities strategists noted.

One scenario that would be good for gold is if the Fed doesn't offer any new hints about tapering while maintaining its view that inflation is transitory in light of the higher CPI numbers. In this case, gold could find support again. "If the taper announcement is signaled far down the road … that could spark an additional inflation-hedging appetite," TDS strategists added.

The Fed announcement will determine whether gold can break the $1,900 an ounce level by the end of the week or fall below $1,850, FXTM senior research analyst Lukman Otunuga pointed out.

"If the central bank remains dovish and continues to preach the 'transitory' mantra, this could inject gold bugs with fresh inspiration to challenge the $1,900 psychological level," Otunuga said. "Alternatively, any hint of tapering discussions or presence of hawks in the meeting could deal a blow to gold prices. Such a development may drag prices back below the $1,855 level."

Commerzbank analyst Carsten Fritsch described gold's trading pattern as quite erratic this week, blaming short-term investors' positioning ahead of the upcoming Fed announcement.

"The majority of them clearly expect the U.S. Fed to give the first signs tomorrow that an exit from its ultra-expansionary monetary policy is drawing closer. If this fails to be the case, or if the signals are less clear, yesterday afternoon's upswing will doubtless have been a foretaste of what can be expected in the second half of the week," Fritsch said on Tuesday.

Fritsch added that the long-term outlook remains a bullish one for gold, citing negative real interest rates and higher inflation.

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