Make Kitco Your Homepage

Gold price hits June highs as markets reprice a 50-bps move from the Federal Reserve

Kitco News

Editor's Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today's must-read news and expert opinions. Sign up here!

(Kitco News) - Gold trading at an eight-month high of around $1,900 an ounce could be a sign that traders don't believe that the Federal Reserve will be able to do much to stop the current inflation threat, at least in the near term, according to some analysts.

Gold prices have rallied higher as traders and investors see the Federal Reserve raising interest rates by 50 basis points as unlikely. At the start of the week, markets were pricing in a more than 50% chance of an aggressive move from the U.S. central bank at its next monetary policy meeting. However, since the release of the minutes of the FOMC's January meeting, expectations have dropped to about 30%.

However, the gold market is not entirely out of the woods just yet, as there is still talk that the Federal Reserve could surprise markets with an intra-meeting move. However, some analysts think that would be unlikely.

"I think a move before the March meeting would signal panic in the marketplace, and that is what they don't want to do," said Bart Melek, head of commodity strategy at TD Securities. "I think this move we are seeing in gold is because investors don't believe the Federal Reserve will be able to crack down on inflation, especially in the short-term."

Melek noted that looking at inflation expectations, break-even rates in the short-end of the yield curve, specifically five-year rates, have jumped higher. In contrast, break-even rates at the long end have held relatively steady.

Melek added that in the current environment, the Federal Reserve probably still has time to see if inflation pressures start to ease. He said that there are elements in rising consumer prices that could be transitory.

Rally for 'wrong' reasons? Gold price eyes high levels as Russia-Ukraine tensions get mixed with Fed policy mistake calls

"I think inflation is going to remain elevated for a prolonged period, but we just don't know how high it will be," he said. "I think the Fed will continue to sacrifice short-term inflation in favor of supporting the labor market."

Melek added that if inflation remains near its current levels through most of the year, then the Fed will act more aggressively. However, he said he doesn't see the central bank cracking the whip on inflation until after the third quarter.

Although the U.S. central bank is expected to raise interest rates, some economists have said that the latest minutes show that markets might be a little too aggressive in their expectations.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the minutes clearly showed that the Federal Reserve is not seriously considering a 50-basis point move next month.

The minutes showed that the U.S. central bank is looking to tighten its monetary policy faster than its last tightening cycle. However, Ashworth said that isn't a significant bar to climb over.

"The suggestion that 'if inflation does not move down as they expect, it would be appropriate for the [FOMC] to remove policy accommodation at a faster pace than they currently anticipate,' is arguably a little more hawkish. But still, nothing in the minutes suggests Jim Bullard's ultra-hawkishness is shared by the majority on the FOMC," he said.

However, some analysts expect that gold will continue to do well no matter what path the Federal Reserve takes.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he sees gold's momentum as indicating that investors are looking to hedge against the Federal Reserve's failed attempt to control inflation.

"The first-rate hike no matter the timing will be regarded as gold positive as it will set the U.S. economy on track for a sharp economic slowdown," he said. "The fed will hike until something breaks, and the sooner they start, the sooner that gold supportive point will be reached."

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.