By Barani Krishnan
Investing.com -- Gold’s hemorrhaging showed no signs of slowing as bears continued to attack the haven ahead of the first pandemic-era U.S. rate hike due later on Wednesday.
The only saving grace for the yellow metal: Support at $1,900 … at the time of writing, at least.
“The pace of declines has slowed somewhat as the price approached $1,900,” noted Craig Erlam, analyst at online trading platform OANDA.
But with the rapidly shifting geopolitical mood around the Russia-Ukraine war and unknowns over the Federal Reserve’s monetary tightening schedule, it’s a question of whether the selloff will continue, Erlam said. “The environment is still so uncertain and inflation remains sky-high,” he added.
The most-active gold futures contract on New York’s Comex, April, was down $20.05, or 1%, at $1,928.70 an ounce by 1:05 PM ET (17:05 GMT).
The benchmark gold futures contract’s last positive finish was on March 10, when it settled above $2,000.40. Prior to that, it hit a 19-month high of $2,078.80 on March 8 after piggy-backing on the geopolitical risk that followed Russia’s invasion of Ukraine. U.S. inflation readings running at 40-year highs had also boosted gold, seen as a hedge against both political and financial troubles.
But this week alone, Comex gold futures have lost 3.7%, heading for their worst week since June. The tumble came as negotiators tried to find an end to the Ukraine war, with little results to show.
Gold’s slump was also hastened by concerns about the rate hike widely expected at the monthly meeting of the Fed’s policy-making Federal Open Market Committee, or FOMC, which concludes Wednesday. The FOMC is forecast to raise interest rates by 25 basis points, or a quarter percentage point, after leaving them at virtually zero since the Covid-19 outbreak of March 2020.
Many economists say the hike will not be enough in an environment where the Consumer Price Index jumped 7.9% in the year to February. The central bank's own tolerance for inflation is just 2% per annum.
On top of a maximum of seven potential rate hikes this year — as per the number of FOMC calendar meetings — the Fed will also attempt to reduce its balance sheet, which now stands at $8.9 trillion after the central bank loaded up on Treasuries and mortgage-backed securities to support the economy since the outbreak.
That action will reduce the cash in the financial system — but it will also bring uncertain consequences for bond and stock markets. Economists warn that if inflation doesn’t begin to subside in response to these initial moves, policymakers will end up raising rates too high, sending the economy into a recession and financial markets into a slump.