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(Kitco News) After largely ignoring the Federal Reserve's first pause in fifteen months, gold is steady in the face of the central bank's hawkish warning of two more rate hikes.
Analysts are bullish on the precious metal, questioning the Fed's dot plot projections and forecasting gold to rise above $2,000 an ounce on a sustained basis.
As the Fed kept rates in a range of 5% to 5.25% on Wednesday following ten consecutive increases, Federal Reserve Chair Jerome Powell confirmed that the median dot plot saw at least two more 25-bps rate hikes this year.
Some analysts have criticized the contrasting views of the Fed officials, noting that these assumptions are often unreliable.
"A year ago today, the FOMC's median dot for 2023 was near 3.75%, which serves as a reminder that these rate forecasts have little bearing on future rate decisions," said TD Securities senior commodity strategist Daniel Ghali.
Breaking down the Fed's dot plot estimates further, two FOMC members supported no more hikes for the rest of this year, four expected one more hike, nine said they saw two more hikes, two estimated three hikes and one supported four additional rate increases.
"Since the spread of members' dots is so wide, ranging from 3.625% - 5.875% for next year, the median estimate is not all that relevant," said TD Securities head of commodity strategy Bart Melek.
Even Powell noted that the dot plot is just an individual assessment. "We always write down at these meetings what we think the appropriate terminal rate will be at the end of this year," Powell said. "In reality, it can wind up being lower or higher. I can't tell you that I ever have a lot of confidence that we can see where the federal funds rate will be that far in advance."
Implications for the gold market
The market is known to take cues directly from the dot plot and the Fed's tone, with the June decision being described as a "hawkish skip."
But its impact on markets and the negative connotation for gold will be short-lived, noted Melek.
"Until data suggests that the U.S. economy is materially weakening, the market will likely take the U.S. central bank at face value as no one knows when macro conditions will slump," he said. "This may be bad for gold, as prices for the yellow metal could well move into the low $1,900 in the not too distant future if data remains strong enough to corroborate the Fed's interest rate forecast and technical supports are breached."
As more data confirms a slowdown in the U.S. economy, it will become clearer that the Fed can't afford to raise rates further, and gold will resume its rally. A jump to $2,100 an ounce could be in the cards, added Melek.
"Given the world is looking like the Fed will not actually pull the trigger two more times, as suggested by the 'meaningless' median dots, our outlook for the yellow metal is positive," he said. "Gold could well rally on any data showing inflation pressures are easing, and the economy is reversing gears. We see gold averaging $2,100/oz in the final three months of the year, as we suspect the U.S. central bank will cut rates aggressively thereafter, potentially before the two percent inflation target is reached."
The macro data out of the U.S. remains mixed, with analysts digesting the latest retail sales, jobless claims, and regional manufacturing activity.
"The Federal Reserve's hawkish hold yesterday suggests an inclination to hike again in July, but today's mixed retail sales and manufacturing data fail to offer a clear steer," said ING chief international economist James Knightley. "The grinding higher in jobless claims is perhaps the bigger story, but it probably won't be enough to lead to a sizeable slowdown in payrolls growth to deter the Fed just yet."
The levels gold investors need to watch on the downside are $1,935, $1,900, and $1,890 an ounce, the analysts said. At the time of writing, August Comex gold futures were trading at $1,970.50 an ounce, up 0.08% on the day.
The Fed is data-driven
With Powell stating that the July meeting will be 'live,' expectations of whether the Fed will hike again will be widely debated. Markets are currently pricing in a 70% chance of a 25-bps hike at the July meeting, according to the CME FedWatch Tool.
"Our economic forecasts expect household and labor demand to weaken over the summer," said ANZ economists on Thursday. "But for now, they are still above the economy's supply potential. Reflecting current economic strength, we continue to expect another 25bp fed funds hike."
With the Fed largely data-driven into the July meeting, macro releases will become big market movers.
"Gold pricing is still searching for confirmation that the Fed is really done and/or a US$-negative catalyst," said MKS PAMP head of metals strategy Nicky Shiels. "Data will become more sensitive and important into a July meeting where a hike is pretty much guaranteed."
Gold's technical trading is essential to keep an eye on as the longer the metal remains steady in the face of this hawkish pressure, the more likely prices will rally, noted Shiels.
"On the surface, it's a bearish precious outcome, but the longer gold can't go down, [it] must go up. The thinking is that gold prices will read through their hawkish rhetoric/talk, and at the core is, the Fed has paused (and can pause again) = therefore, they're done," she said in a note Wednesday.
