Gold futures experienced a significant drop on Tuesday following Federal Reserve Chair Jerome Powell’s statements, which hinted at the possibility of more aggressive interest rate hikes as the central bank continues to combat inflation. Powell’s remarks were part of his prepared testimony for the Senate Banking Committee.
“If the data were to suggest that faster tightening is necessary, we would be prepared to increase the pace of rate hikes,” Powell said.
For those who keep track of the Fed’s impact on interest rates, gold, and the U.S. market, Powell’s comment was not a surprise, according to Jeff Wright, Chief Investment Officer (CIO) at Wolfpack Capital. He stated that gold is “heading lower based on the distinct possibility of increasing the pace of future interest rate hikes, sharper and longer.” Wright added that the possibility of a 50 basis point increase for March is now much higher than before.
Depending on Powell’s live testimony, “gold falling to $1,800 could be possible very quickly,” Wright said. He noted that there is “not a lot of support for gold at the moment” and that it’s currently a “wait and see” situation.
Powell is set to appear before a House panel on Wednesday at 10 a.m. Eastern.
The Fed has rapidly increased rates since March of last year. Over the past month, investors who previously doubted the Fed’s forecast for a peak in the fed-funds rate above 5% changed their tune. They have also largely priced out expectations for rate cuts by year-end.
Although Treasury yields retreated earlier this year, and the U.S. dollar softened, allowing gold to rally, these movements were reversed in February.
Peter Grant, Senior Metals Analyst at Zaner Metals LLC and Tornado Precious Metals Solutions, noted in a statement ahead of Powell’s testimony that “The gold market’s focus remains squarely on the ebb and flow of monetary policy expectations, and the resulting movements in interest rates and the dollar. However, if it becomes evident that rate hikes alone can’t contain inflation, gold may rally on flight to quality in anticipation of stubborn inflation and heightened risks of a recession.”
In conclusion, Powell’s comments have undoubtedly impacted the gold market, and investors are anxiously awaiting his live testimony to better understand how the Fed plans to handle the ongoing inflation issue.