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Fed in focus: gold price gets pulled closer to $1,900, here's what to expect next

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(Kitco News) The extremely volatile commodity sector continues to weigh on gold as markets shift their focus to the Federal Reserve's expected 25 basis rate hike on Wednesday.

At one point, gold lost $50 on Tuesday as oil prices and other raw commodities tumbled. Oil fell below $100, with West Texas Intermediate crude futures and Brent down about 5% on the day and last trading at $97.39 and $101.24 per barrel, respectively.

"It seems the gold market is a victim of the abandon widespread commodity appreciation trade. Gold prices are trying to find a floor and eventually will stabilize even if oil prices continue to slide," said OANDA senior market analyst Edward Moya.

In the meantime, the U.S. equity market climbed higher on a rebound in risk sentiment, and gold was pulled closer to the $1,900 an ounce level. April Comex gold futures were last at $1,918.90, down 2.14% on the day.

"U.S. stocks are getting a boost from a trifecta of reasons: economic and political pressure grow for a Russian ceasefire, oil prices plunge, and after both a softer-than-expected PPI report and a disappointing Empire survey supports the idea that the Fed won't have to be aggressive with tightening policy over the next few meetings," Moya said on Tuesday.

The focus now is mostly on the Fed's rate decision and central bank Chair Jerome Powell's testimony on Wednesday.

Live 24 hours gold chart [Kitco Inc.]

What's the Fed's plan?

The Fed is expected to hike rates by 25 basis points on Wednesday afternoon — the first policy tightening move since 2018. And that has already been largely priced in by the markets.

"The Fed has clearly telegraphed its intent to raise the fed funds rate 25 bps at this week's meeting and communicated that balance sheet reduction (aka Quantitative Tightening or QT) should begin by mid-year," said Comerica Wealth Management chief investment offer John Lynch.

Close attention will be paid to the updated economic projections and the dot plot. ABN AMRO is pricing in seven rate increases this year as inflation risk outweighs the risk to growth, said the Dutch bank's senior U.S. economist Bill Diviney said.

"We expect upgrades to inflation forecasts and downgrades to growth forecasts on the back of recent developments. Rate hike projections are likely to increase significantly from the three 2022 hikes projected last December, but will probably fall short of the seven hikes we now expect this year," Diviney noted.

ABN AMRO is forecasting to see seven 25bp hikes for this year, which would take the fed funds rate to 1.75-2.00% by December.

One ongoing risk that comes with the Fed's tightening cycle is the impact on economic growth.
"The risk of a recession over the next 18 months is higher than before Russia's invasion, but the U.S. economy is still likely to see continued growth, though at a slower pace than seemed possible at the start of the year," said Comerica Bank chief economist Bill Adams. "Comerica forecasts for U.S. real GDP to slow from 5.6% year-over-year growth in the fourth quarter of 2021 to 2.0% year-over-year growth in the fourth quarter of 2022."

Fed Chair Powell already told Congress at the beginning of March that Russia's invasion of Ukraine and the new sanctions could have "unintended consequences." Powell also stressed that "everything is so uncertain" and "at times like this" the central bank moves "carefully."

Markets anticipate that Powell will maintain this line of thinking during his press conference on Wednesday.

Also, any comments on the Fed's plans to reduce its balance sheet could move the market as well. During his testimony, Powell noted that Fed officials might use the March meeting to iron out a plan to reduce the central bank's nearly $9 trillion balance sheet.

"We continue to expect the Fed to begin allowing maturing bonds to roll off the balance sheet already in May, initially at a pace of $15bn per month, ultimately rising to a pace of $100bn per month by September," Diviney pointed out. "This is the maximum pace at which the balance sheet can unwind in a 'passive' manner."

What's this year's 'potential end game'? Gold price at $2,500, oil price at $50 – Bloomberg Intelligence

Can gold hit $2,000 again?

Gold could see another selloff if geopolitical tensions continue to deescalate and the U.S. central bank begins to raise rates, said strategists at TD Securities. The key level to pay attention to is $1,914 an ounce.

"A break below $1914/oz would catalyze a substantial selling program. If the market has started to discount a future in which the growth shock could fade at a faster pace than the inflation shock, as we expected, then gold prices could be especially vulnerable to a more hawkish Fed profile, opening the door to a deeper consolidation," they said on Tuesday.

But if the war in Ukraine continues to weigh on market sentiment, gold could see a move back to $2,000, Moya explained. "The war in Ukraine does not look like it will have any immediate de-escalations and that should provide underlying support for gold prices. 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," he noted.

MKS PAMP has just upwardly revised its gold outlook, looking for prices to average $2,000 this year, citing changes to its macroeconomic assumptions.

"We originally thought a stagflationary-like backdrop would support Gold (due to COVID, some zero-COVID policies, supply-chain risks etc); that backdrop is being accelerated with growing risk of a hyperinflation depression in Russia and a recession for the region / Europe. The structural and ongoing regime change – from globalism to isolationism and the associated inward looking trade policies– is exacerbated by this war and is inflationary. Theres also a worrying trend in that the global monetary & payments system and wealth have now been politicized and weaponized," said MKS PAMP head of metals strategy Nicky Shiels.

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