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Gold price to 'lose momentum' ahead of Fed meeting, hawkish stance remains a threat after inflation report, says TD Securities

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(Kitco News) The gold market is likely to retreat and settle at a more stable level in the short term since the Federal Reserve remains a threat after the February inflation report, according to TD Securities.

"The gold market should lose momentum once it settles at a stable technical level and give up some of its recent gains back into next week, as there is still a risk the Fed continues to champion a hawkish stance," said TD Securities head of commodity strategy Bart Melek.

The February inflation report confirmed that price pressures are not coming down fast enough, so markets will still expect another 25-basis-point rate hike at the Fed's March 22 meeting. And that is despite the recent fallout from the banking sector.

"Given the high rate of inflation … it would be hard for the U.S. central bank to tilt policy aggressively to a dovish stance at this time, particularly since financial system risk are ebbing amid official statements pointing to a readiness to provide backstops to stabilize the financial system," Melek noted.

The latest consumer price index data showed that, excluding food and energy, prices rose 0.5% on a monthly basis, which was the biggest increase in five months. From a year ago, core CPI was up 5.5% — broadly in line with market expectations. Economists pay particular attention to the core CPI measure since it excludes volatile food and energy sectors, which is why it is viewed as a better indicator of underlying inflation.

Melek added that considering the macro situation, it is too early for "an uninterrupted bull run" in gold.

After rallying to a high of $1,919.50 an ounce on Monday after the Silicon Valley Bank's collapse, gold's rally paused, but prices were steady above $1,900 an ounce.

After assurances from U.S. President Joe Biden and other U.S. policymakers, April Comex gold futures were last trading at $1,909.09, down 0.34% on the day.

"The combination of moderating wage pressures and financial system concerns have prompted markets to sharply lower rates across the treasury curve, price-in a sharply lower terminal rate, sped up expectations for a pivot, and higher credit risks," Melek pointed out. "This rally is likely being augmented by covering of short positions taken in response to the Fed Chair's recent hawkish rhetoric ahead of Friday's payrolls."

But a pause in the price action does not mean gold won't see another big rally later this year, especially with the eventual Fed pivot now seeming more real.

"High rates now and increased credit risk should slow the economy faster, lowering rates along the curve into 2023. As we are near-peak Fed Funds, with an earlier pivot possible, recent price action suggests that markets are more focused on the longer-term and when the tilt toward a more dovish policy will take place, and less concerned that the terminal rate will surge," Melek explained.

As markets focus on economic gauges like inflation and wage growth to determine Fed's direction, TD Securities forecasts gold to trade above $1,925 later in the year. Melek also added that there is "a significant upside risk in the months to come."

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