Gold Price Plunges to March Low on Elevated Fed Rate Expectations

The price of gold has sharply declined, hitting its lowest level since March due to expectations of a Federal Reserve interest rate increase. The Fed’s concerns about persistent inflation and the possibility of another rate hike in 2023, combined with strong US macroeconomic data, have heightened the likelihood of further policy tightening. This has led to an increase in US Treasury bond yields and pushed the US Dollar to its highest point since November 2022, diverting investors from non-yielding gold.

Gold has been on a continuous downward trend for seven consecutive days, bringing it down to $1,815 during the recent Asian trading session. Interestingly, this decline has occurred despite the generally weaker performance of equity markets, which would typically boost gold’s appeal as a safe haven. It suggests that the prevailing direction for gold remains downward. However, it’s worth noting that extreme oversold conditions on the daily chart warrant caution among bearish traders.

In the realm of market developments, the gold price is suffering due to growing expectations of a more hawkish stance by the Federal Reserve. This streak of declining gold prices is the longest since August 2022, with Fed officials emphasizing the need for a prolonged period of restrictive monetary policy to bring inflation back to the 2% target. Fed Governor Michelle Bowman is open to further rate hikes if incoming data suggests insufficient progress on inflation, and Fed Vice Chair Michael Barr emphasizes the importance of maintaining sufficiently restrictive rates to achieve their goals. Cleveland Fed President Loretta Mester also warns of inflation risks skewed toward the upside, necessitating higher rates to continue the disinflation process.

Adding to this, the US ISM Manufacturing PMI has reached its highest level since November 2022, signaling a third consecutive month of improvement. Increased consumer spending and rising gasoline prices suggest higher future prices, further supporting the case for policy tightening. As a result, the market now anticipates a 45% chance of an additional 25 basis point rate hike this year, pushing the yield on the benchmark 10-year US government bond to a 16-year high. The US Dollar’s surge since November 2022 has also exerted downward pressure on the gold price, with even a weaker risk tone failing to provide relief for gold bulls.