Gold futures rose on Wednesday to snap a three-session slump, then moved lower after the the Federal Open Market Committee increased its inflation forecasts for this year and next, and signaled higher interest rates in 2023.
In a statement released about a half hour after the gold futures settlement, The central bank said it might raise interest rates earlier than it previously expected, with two interest rate hikes possible in 2023.
“The stakes were high with this Fed meeting and policy statement, as investors wondered whether the FOMC would blithely ignore or reasonably acknowledge the latest inflation and economic data,” Brien Lundon, editor of Gold Newsletter, told MarketWatch. “We got the latter, as the FOMC fired its first post-COVID shot across the market’s bow, with the majority now predicting the first rate hikes by the end of 2023.”
“It wasn’t much of a shift from the previous majority dot-plot predictions of no rate hikes through the end of 2023, but it was enough to send investors selling gold and other assets,” he said.
“The real issue will be if the Fed will, or even can, raise rates higher than the rate of inflation, which seems doubtful given the size of the federal debt and its growth trajectory,” said Lundin. “Negative real rates are not only probable, but necessary in this environment, and this will be a very bullish factor for gold over the long term.”
For now, gold will “remain volatile and subject to additional sell-offs until the market begins to understand this dynamic,” he said.
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Gold futures so far this week are down about 1%. Commodity investors have been eyeing the outlook for inflation, which has shown evidence of surging in the U.S. in the recovery phase from the COVID pandemic.
U.S. import prices rose 1.1% in May—and were up 0.9% minus fuel—contributing to an 11.3% in the past 12 months, according to government data released Wednesday.
“Higher inflation expectations as reflected by recent data also lend support to the price of gold and could increase demand for gold and lead to further price increases,” said Chris Gaffney, president of World Markets at TIAA Bank, in emailed commentary.
“Gold continues to be a popular inflation hedge and investors will continue to move into gold and precious metals to offset the possibility that the recent spike in inflation rates will NOT be transitory with prices remaining elevated for an extended period,” he said.
Many participants had expected that spiking inflation would prompt the Fed to at least begin early stage discussions about rolling back some features of its pandemic-era accommodations, including tapering its asset-purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities monthly.
On Wednesday, the Fed maintained the $120 billion in monthly bond purchases.
Moves for metal prices come as China’s National Food and Strategic Reserves Administration, said Wednesday that it planned to release copper, aluminum, zinc and other national reserves in batches in the near future to ensure the supply and price stability of bulk commodities.
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In other economic news Wednesday, U.S. housing permits dropped 3% in May to 1.68 million yearly pace, while starts climbed 3.6% to 1.57 million annual rate. April U.S. housing starts were lowered to 1.52 million from 1.76 million.