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Gold price takes a hit as global central banks confirm Fed's hawkish bias

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(Kitco News) The gold market took a hit Thursday after a simultaneous hawkish push by central banks around the world combined with Federal Reserve Chair Jerome Powell's firm stance on two more rate hikes this year.

During his second day of testimony before Congress, Powell remained fully committed to two more rate hikes this year after holding rates steady at the June meeting.

"If the economy performs as expected, it would be appropriate to perhaps raise rates twice this year," Powell testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. "We maintained our rate to give us more time to make these decisions. We are committed to getting inflation under control."

Global hawkish push

Other central banks are joining Powell's hawkish stance. In a surprise move, the Bank of England raised its main interest rate to 5% from 4.5%. This was the largest hike since February, bringing the rate up to the highest since 2008. "There has been significant upside news in recent data that indicates more persistence in the inflation process," the central bank said.

Markets were surprised by the move. "The BOE's inflation fight will force them to tank the U.K. economy," said OANDA senior market analyst Edward Moya.

Norway's central bank also hiked by 50 basis points Thursday, raising its rate to a 15-year high of 3.75%. On top of that, the central bank signaled another increase in August, projecting rates to rise to 4.25% in the fall.

This was Norway's 11th consecutive rate hike as it battles sticky inflation. "If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched," Norges Bank Governor Ida Wolden Bache said in a statement.

The Swiss National Bank raised its rate to 1.75% from 1.5% Thursday and said more rate hikes would come.

In a reversal of its previous unorthodox monetary policy, Turkey's central bank hiked its key rate by 650 basis points to 15% on Thursday, adding that there is more tightening ahead. The move underwhelmed, with market consensus calls expecting an even steeper hike by the new central bank Governor Hafize Gaye Erkan.

More rate hikes from central banks are weighing on the global growth outlook, which could make the U.S. dollar a more attractive safe-haven versus gold, warned Moya.

"Gold prices are declining after central bank-a-palooza saw larger-than-expected tightening across several European central banks," Moya said. "The global growth outlook is getting slashed and that could trigger a safe-haven move back into the dollar and not necessarily gold."

Gold price reaction

The gold market touched a three-month low of $1,922.60 after Powell's testimony Thursday, with the Fed focused on the inflation in the service sector and a tight labor market.

"Powell stuck to his script of emphasizing 'the labor market remains very tight' and 'inflation remains well above our longer-run goal of two percent,'" said BMO Capital Markets managing director Colin Hamilton. "According to Bloomberg, gold-ETFs reduced holdings by 83,171oz in the last trading session, bringing year-to-date net outflows to 211,035koz, albeit with little sustained flows in either direction."

At the time of writing, August Comex gold futures were trading at $1,923.80, down $21 on the day.

"Gold's progress going forward will likely focus on U.S. jobless claims as opposed to inflation data, with the U.S. labor market now the Fed's primary focus when considering further rate hikes," said SP Angel analyst John Meyer.

With Powell remaining hawkish, all of the 2023 rate cut bets are off the table, said MKS PAMP head of metals strategy Nicky Shiels. "And with that, the premium needs to be unwound in gold," Shiels noted.

Based on an analysis of 3-month SOFR futures (a proxy for Fed hikes/cuts expectations) versus gold, "the model implied gold price is $1,878/oz, a full $50 lower," she pointed out.

Some see the Fed introducing rate cuts only in March, which implies higher rates for longer.

"We now expect the delayed recession to mean a later start to Fed rate cuts, meaning a more prolonged period of highly restrictive monetary policy," said ABN AMRO senior U.S. economist Bill Diviney. "We now expect Fed rate cuts to start in March 2024, one quarter later than our previous December 2023 expectation."

Commerzbank has lowered its year-end gold forecast by $50 following Fed's hawkish messaging, citing another rate hike in July and rate cuts only in the second quarter of next year.

"This is likely to postpone any sustained recovery of the precious metal. We have lowered our gold price forecast accordingly and expect sideways trading for the time being," Commerzbank analyst Thu Lan Nguyen said. "Our forecast for the second half of the year is only $50 lower than before (year's end $2,000 per troy ounce, previously $2,050)."

Next year, the bank anticipates for gold to resume its rally and hit a new all-time high of around $2,100 an ounce.

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