Gold faces headwinds as hawkish Fed, rising yields pale optimism

During the September FOMC meeting, the Federal Reserve maintained the federal funds rate target range at a 22-year high of 5.25%-5.5%. Fed Chair Jerome Powell, however, conveyed that interest rates must remain elevated for an extended period due to the renewed strength in the economy. While the central bank is nearing the end of its rate hikes, twelve out of nineteen participants in the FOMC indicated their agreement with another rate hike before the year’s end, consistent with the previous dot plot from June.The updated Summary of Economic Projections revealed a notably hawkish upward revision in rate projections for 2024 and 2025, reflecting a reduced likelihood of rate cuts. The median rate forecast for the end of 2023 remained at 5.6%, implying the possibility of one more rate hike this year. However, the forecasts for 2024 and 2025 were significantly adjusted upward to 5.1% (compared to the prior 4.6%) and 3.9% (compared to the prior 3.4%), respectively. This suggests a smaller rate cut in 2024 compared to the projections made during the June FOMC meeting. Additionally, GDP forecasts for 2023 and 2024 were revised upward, while the unemployment rate and core PCE inflation were adjusted downward. These revisions indicate that FOMC members are growing more confident in a smooth economic transition.

In summary, the FOMC meeting’s tone was more hawkish than anticipated, resulting in the strengthening of the US dollar to a six-month high and a rise in US 10-year treasury yields to 4.5%, the highest level since 2007. These factors weighed down on gold, which is a non-yielding asset.

Furthermore, data released on Thursday revealed a significant drop in US weekly jobless claims to 201k, the lowest since late January. This supports the Fed’s hawkish stance, suggesting a historically tight labor market. Meanwhile, holdings in the SPDR gold ETF continued to decline, reaching their lowest point since January 2020.

Former Federal Reserve Bank of St Louis President James Bullard also expressed the possibility of further interest rate hikes to guard against potential inflation risks, adding to the overall hawkish sentiment. Several other Fed officials are scheduled to speak in the coming days now that the blackout period has ended.

Looking ahead to the coming week, market focus will be on the US PCE price index, personal spending data, and the final estimate of Q2 US GDP. Given the recent surprise in headline CPI figures, there is a possibility of an upside surprise in PCE inflation. Additionally, consumer spending data will be closely monitored, as it has demonstrated resilience thus far. Personal spending in the United States saw a significant increase in July 2023, driven in part by consumers tapping into savings and utilizing credit cards for financing.
Whether this trend continues remains to be seen. In the near term, it is expected that yields may remain elevated, keeping gold prices subdued.(The author is Vice President, Head Commodity Research at Kotak Securities)

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