Gold falls as rates rise ahead of the Fed’s rate hike decision

Gold prices dropped on Wednesday as increased US Treasury rates and the Federal Reserve’s anticipated interest rate rise announcement dampened demand for zero-yield metal. As of 0217 GMT, spot gold was down 0.3 percent at $1,862.48 per ounce. Gold futures in the United States declined 0.4 percent to $1,82.40.

Benchmark U.S. 10-year Treasury rates rose after falling below the critical 3% level the previous session, ahead of the Fed’s widely anticipated large interest rate rise to try to limit skyrocketing U.S. inflation. While gold is seen as an inflation hedge, rising short-term interest rates and bond yields in the United States tend to raise the opportunity cost of keeping non-yielding bullion.

The Federal Open Market Committee of the United States’ central bank is scheduled to announce a policy statement at 1800 GMT, followed by a press conference by Fed Chair Jerome Powell. The market anticipates a decision on raising the benchmark overnight interest rate as well as news on the Fed’s $8.9 trillion balance sheet reduction.

“Markets have now priced in a 50 basis point increase… If the message becomes much more hawkish, gold is likely to fall more,” said OANDA senior analyst Jeffrey Halley. “If the statement’s advice remains basically unaltered, then a short-term rebound to $1,880 is probable as the US currency falls.”

The dollar has stayed near to 20-year highs, making greenback-priced gold less appealing to foreign purchasers. On Tuesday, Russian soldiers bombarded sites in eastern Ukraine, even as the European Union prepared to impose oil sanctions on Moscow. During economic and political downturns, gold is seen as a safe haven of value. Spot silver fell 0.1 percent to $22.54 per ounce, while platinum held steady at $961.62 and palladium rose 0.2 percent to $2,260.28.