Gold tumbles to worst week since 2021 on Fed hawkish stance

By Onome Amuge.

Gold began the year on a bullish territory as it rose over 13 per cent in the first five-month period. However, the rest of the year has been a volatile journey which has seen the yellow metal on a see-saw motion.

The recent week saw gold tumble to its worst weekly performance since June 2021 as the yellow metal plunged 4.3 per cent at the end of September after the Federal reserve struck a hawkish stance.

Spot gold dipped 0.5 per cent to $1,855.95 per ounce, while U.S. gold futures lost 0.3 per cent to $1,872.30 per ounce.

David Meger, director of metals trading at High Ridge Futures, said, “Gold’s outlook, fortunately or unfortunately, has a lot to do with the underlying interest rate environment moving forward.”

Gold and the U.S. dollar often have an inverse relationship. When the dollar strengthens, the price of gold in dollars typically falls, and vice versa. This inverse correlation is because gold is priced in U.S. dollars worldwide. When the dollar rises in value, it takes fewer dollars to buy the same amount of gold, leading to a decline in the gold price.

Analysts said it comes at no  surprise that gold has fallen below $1,900 looking at the surging momentum in the bond yields and the U.S. dollar.

This is as yield on 10-year notes soared to a new 16-year high above 4.6 per cent during the week and the U.S. dollar index rose above 106 points, hitting its highest level since November.

Craig Erlam,senior market analyst,UK & EMEA,OANDA,observed that  the outlook for gold doesn’t look particularly promising in the short-term.

Erlam said, “While there’s every chance policymakers have gone too far and the data may outperform their expectations, allowing for a recovery in the price of gold, a shutdown could complicate things.

That arguably makes Fed speak all the more influential and may encourage a little more balance in the commentary. For now, though, gold has broken big support levels and with momentum, which doesn’t bode well for it. It’s seen support around $1,860 which has been a notable level in the past and if it can manage a rebound, $1,900 could be key.”

Though gold’s performance has been considered disappointing, some analysts note that the selloff hasn’t changed the broader landscape, adding that even with the week’s selloff, gold continues to hold up relatively well.

Ole Hansen, head of commodity strategy at Saxo Bank, said that the negative correlations between gold and the U.S. dollar and bond yields have significantly broken down.

However, Hansen added that gold should find some support as the Federal Reserve’s aggressive monetary policy continues to push the U.S. economy closer to a recession, even as they are unable to get inflation back to the two per cent target.

Hansen averred that demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged.

“With that in mind, we maintain a patiently bullish view on gold,” he added.