Gold Briefly Below $1,700 to 27-Month Low as Bets Swing Over Fed

© Reuters.

By Barani Krishnan

AiVIF.com -- It has happened — gold’s foray into $1,600 territory — and the question is what comes next.

Gold for August delivery on New York’s Comex settled down $29.70, or 0.6%, at $1,705.80 per ounce on Thursday, after briefly breaking the $1,700 support. The session low of $1,695.05 marked a bottom since March 31, 2020.

“We could see gold back in favor as the economy drifts into recession. For now...there may well be more pain to come,” said Craig Erlam, analyst at online trading platform OANDA.

Gold’s latest trough came as markets stressed over whether the Federal Reserve will opt for a record hike at its upcoming July 27th decision on rates to curb runaway U.S. price pressures, or continue to prioritize growth over inflation.

Since the Consumer Price Index for the year to June came in on Wednesday at a new four-decade high of 9.1%, bets on rates have been volatile — with the pendulum swinging between an unprecedented increase of 100 basis points for July versus the broader consensus for a 75-basis point hike.

The CPI data was followed up on Thursday with the Producer Price Index’s 11.3% rise during the year to June — the largest such increase since a record 11.6% jump registered during the 12 months to March 2022.

Gold’s tumble to a 27-month low earlier in the day also came as the Dollar Index, which pits the U.S. currency against six other majors, hit a new two-decade high above 109.

The yellow metal came off the lows after Fed Governor Chris Waller said the central bank can’t overdo rate hikes despite shocking price pressures. Waller said he would support a 75-basis point hike at the Fed’s upcoming July 27th decision on rates, over bets for a 100-basis point increase.

The remarks from one of the Fed’s more hawkish members calmed investors who had been on tenterhooks since Wednesday’s rampant CPI data. St. Louis Fed President James Bullard, known as being a super hawk, also soothed investors by opting for a 75-bps hike in the upcoming July 27th decision on rates.

Yet, both Waller and Bullard said they would be open to doing more on rates if data called for it.

“For me, a 75-basis point increase at this meeting puts us to neutral,” Waller said. “However, if incoming data over the next two weeks shows that demand remains strong, I would incline toward a bigger rate hike.”

“Neutral” is Fed speak for getting inflation back to its target of 2% a year.

Bullard said it was plausible for the Fed funds rate to be “higher than 4% by the end of the year if data continues to come in in an unfavorable way.”

Fed funds rates are currently at a high of 1.75%. With four more rate decisions due before the year-end, there would have to be cumulative increases of 2.25% to get to 4%, with a 100-basis point hike likely anywhere between.

The Fed has been trying to manage price growth without implementing excessive rate hikes. But its task is becoming harder with each galloping print on inflation.

Many economists say the Fed kept rates “too low for too long” and could push the United States into a recession in its fight to quickly bring inflation under control.

The central bank left interest rates at between zero and 0.25% for two years during the pandemic and only raised them this year in March.

U.S. gross domestic product already declined 1.6% in the first quarter. A negative second quarter GDP is all that is needed to technically send the economy into a recession.