(Kitco News) The price of gold is feeling the pain of seven months of consecutive losses – the longest streak of declines in more than five decades. And this at a time when the Federal Reserve is preparing to announce its fourth consecutive increase of 75 basis points.
Spot gold is looking to end October down 1.4% on the month, its seventh consecutive monthly decline – something not seen since 1968. Year to date, gold has been down about 10%. Since late March, gold has fallen more than 15%.
After peaking above $2,000 an ounce in March following Russia’s invasion of Ukraine, gold has struggled to sustain further gains. It mostly traded in a downtrend, with a strong US Dollar and higher Treasury yields weighing on the precious metal.
While many continue to debate a Fed pivot or at least the possibility of a slowdown in the coming months, the US central bank is still on track for another oversized rate hike on Wednesday.
Goldman Sachs’ latest note sees the Fed raising interest rates to 5%, higher than the bank’s previous estimate. At the last meeting, the Fed forecast indicated a rate hike of 4.4% this year and 4.6% next year.
After this week’s meeting, the Fed would have raised rates by 375 basis points this year, taking the federal funds rate to 3.75%-4%.
Goldman estimates rate hikes of 75 basis points this week, 50 basis points in December and 25 basis points in February and March. He also added that “uncomfortably high” inflation, the need for slower economic growth and fears of premature easing are the main reasons the Fed could continue to tighten policy beyond February. .
In the meantime, as the Fed continues to slow the economy, the risk of a recession increases. Recession in the United States and Europe is very likely, JPMorgan Chase CEO Jamie Dimon and Goldman Sachs CEO David Solomon said last week.
“We will probably have a recession in the United States [and] going to have, I think, most likely a recession in Europe,” Solomon said during a panel discussion at the Future Investment Initiative conference in Riyadh. “There is no doubt that economic conditions, in my view, will tighten significantly from here.”
With the Fed’s announcement just under 48 hours away, the main question is whether the central bank will slow down after the November meeting. A shift to a slower pace of rate hikes would be positive for gold, which is why some analysts are becoming more bullish on the precious metal.
“The Fed is going to walk away from raising so aggressively. There may be talk of a pullback at the next meeting,” Daniel Pavilonis, senior commodity broker at RJO Futures, told Kitco News. “Gold hasn’t done too well in dollars. If we see the dollar come off, gold can do very well.”
Since the Fed has been very quick with its rate hikes, it might be ready to “drop the pieces and see where they land,” Pavilonis added.
However, many analysts remain cautious, noting that markets are overpricing a Fed pivot. “[The] press conference will be closely watched, but we expect President Powell to maintain the hawkish tone that has consistently been held since Jackson Hole in late August. We don’t think it will give the markets what they are looking for, which is a sign of a pivot. After the decision, Fed officials will go out and spread the message,” said Win Thin, head of global currency strategy at BBH.
The bar for a Fed pivot is quite high, added ING’s global head of markets, Chris Turner. “We think it’s too early to stop the dollar’s rally. After all, the market, indeed, is already pricing the pivot (pricing a 75bps up this week and a 50bps up in December ) and we suspect the chances of another 75 basis point hike in December are understated.”
This year, the persistence of high inflation mixed with the continued strength of the dollar has led to strong outflows from gold ETFs. This was somewhat offset by robust demand in the physical market, according to Suki Cooper, executive director of precious metals research at Standard Chartered.
For the remainder of the year, Cooper said it was looking for continued exits from gold-backed ETFs for the remainder of the year, which would weigh on prices. Next year Standard Chartered is looking for a small net inflow. “The turning point comes when the Fed pivots. Dollar strength should persist over the next few months,” she said in a webinar last week.
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