In an ideal environment, market movements are precisely synced with news, data, and other asset assessment matrices. Of course, in the actual world, there is a bigger likelihood that things may be unduly joyful or depressing. The gold selloff on Thursday was beyond gloomy, touching on absurd panic.
Gold fell below $1,700 and fell by more than 2% on a weekly basis. The Fed’s rate decision and dot plot are expected to increase market volatility next week. Gold fell from highs reached at the start of the Russia-Ukraine war, as a series of Fed interest rate hikes prompted investors to seek higher yields in the dollar and government debt.
Despite its historic role as a hedge in difficult economic times, gold has not benefited from the worsening environment. The Federal Reserve is widely expected to raise interest rates by at least 75 basis points next week. Higher interest rates have a negative impact on non-interest-bearing bullion.
Following the Fed’s policy statements, the dollar’s recent rise suggests that we may witness a ‘buy the rumour, sell the fact’ action. The Fed is widely expected to maintain its aggressive tightening policy, leaving little potential for a hawkish surprise at this stage. Markets have already discounted the possibility that the US Federal Reserve will begin to ease policy in the second half of the year. Having said that, given the relatively solid position of the US economy, it is difficult for investors to bet against the dollar. As a result, even if the dollar weakens in the short run as a result of the Fed event, a large dovish shift in policy stance is likely to be required for the currency to lose ground continuously.
Physical demand for silver is increasing as big consumers India and China import more. The solar sector is driving industrial demand for silver, while jewellery demand is gaining traction. However, silver closely tracks gold, and gold’s weaker backdrop does not bode well.
Next week, the Federal Reserve will announce its interest rate decision and publish the updated Summary of Projections, the so-called dot plot. According to the CME Group FedWatch Tool, markets are currently pricing in a 20% probability of a 100 basis points (bps) rate hike. The market positioning suggests that precious metals could edge lower if the Fed opts to hike the policy rate by 75 bps to the range of 3%-3.25%, causing the dollar to lose interest.
In June, the dot plot predicted that the terminal rate in 2023 would be 3.8 percent. The next dot plot is likely to show that the policy rate will rise to 4% by the end of the year. If the terminal rate rises to 4.5 percent next year and remains there until 2024, the potential negative impact of a 75 basis point rate hike on the currency is likely to be short-lived.
With the Fed projected to continue tightening policy, gold is widely predicted to be under pressure for the rest of the year. Gold was oversold, with Relative Strength Indicator readings around 30 and stochastics below 5/10 on the daily, weekly, and monthly charts, indicating a comeback to $1,686, $1,695, and $1,710 levels, respectively.