By Barani Krishnan
Investing.com -- Just a month ago, you could hear the whisper on every corner of Wall Street: Gold’s going to $2,000.
Now, few seem sure of holding onto the $1,800 level which has been the yellow metal’s support since Christmas, let alone recapturing the $1,900 perch it lost three weeks ago.
For a fourth week in a row, longs holding gold futures booked losses — if not real at least on paper — after aimless trades that barely went beyond the mid-$1,800 level.
Gold for April delivery on New York’s Comex settled Friday’s trading at $1,817.10 an ounce, down $9.70, or 0.5% on the day. For the week, the benchmark gold futures contract lost $23.30, or 1.3%.
The spot price of gold, more closely followed than futures by some traders, was at $1,811.45 by 14:25 ET (19:25 GMT), down $10.86, or 0.6% on the day.
At the heart of the gold trade is the sinking feeling that the metal might be consumed by the same inflation it is supposed to be a hedge against, as the Federal Reserve gears to ratchet up rate hikes again amid stickier-than-thought price growth.
The latest trouble to gold came in the form of the Fed’s preferred inflation indicator — the Personal Consumption Expenditures, or PCE, Index — which grew 5.4% in the year to January, beating forecasts for the month as well as its previous growth in December.
The dollar hit a seven-week high against a basket of major currencies while the yields on the 2-year U.S. note hit their highest since 2007 amid a near reach of the 4% level for the benchmark 10-Year note.
All these were on the back of expectations that the Fed will resort to more hawkish monetary action amid the “hotter inflation in the U.S.,” economist Greg Michalowski said in a post on the ForexLive forum.
U.S. consumer sentiment, meanwhile, hit a 13-month high in February, according to a survey by the University of Michigan that showed Americans more optimistic about spending at a time the Fed actually needs them to show restraint.
“Hot PCE inflation and improving consumer sentiment just broke gold’s back,” said Ed Moya, analyst at online trading platform OANDA. “Gold is in the danger zone as Fed rate hike bets are getting ramped up and as rate cut calls get pushed deeper into next year.”
“Gold still has a bullish playbook for later this year, but the bearish momentum could be strong here if we see a break of the $1,800 level.”
Economists had expected the annualized January growth of the PCE to at least match December’s 5%, after aggressive rate hikes by the Fed for almost a year now.
Without volatile food and energy prices, the so-called core PCE Index was up 4.7% during the 12 months to January versus a forecast 4.3% and a previous growth of 4.4% in the year to December.
“The PCE report shows that the Fed needs to do a little more,” Loretta Mester, Fed president for the region of Cleveland, said in comments carried by Bloomberg. “It is gratifying that inflation declined from [its] peak, but more is needed.”
President Joe Biden, in a statement released by the White House, concurred. “Today’s report shows we have made progress on inflation, but we have more work to do.”
The Consumer Price Index, a broader gauge of inflation, stood at a four-decade high of 9.1% for the year to June. It has moderated since to an annualized growth of 6.4% in January. The Fed’s target for inflation is just 2% per year.
“Wage growth is still running too high to be consistent with timely, and a sustainable return to 2% inflation,” Philip Jefferson, a board member at the Fed, said.
To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020.
The Fed’s first post-COVID hike was a 25-basis point increase in March last year. It then moved up with a 50-basis point increase in May. After that, it executed four back-to-back jumbo-sized hikes of 75 basis points from June through November. Since then, it has returned to a more modest 50-basis point increase in December and a 25-basis point hike in February.
Rate expectations for the Fed’s March 22 policy meeting, monitored by foreign exchange traders, remained at 25 basis points on Friday, though it could end up being twice as much amid increasing calls for tighter policing from the central bank’s hawks.