Gold loses bullish stance over hawkish Fed outlook

By Onome Amuge

Gold plunged to its biggest weekly decline since mid-November despite a recovery at the closing session of the week, after the US Federal Reserve offered a more hawkish outlook on its policy than markets anticipated. The yellow metal  was also rattled by a recovery in the dollar as investors sought safe haven in the currency.

Spot gold was up 0.8 per cent to $1,791.59, but  lost about 0.3 per cent for the week. US gold futures gained 0.7 per cent at $1,800.20 for the day, but traded at a decline as it tumbled nearly two per cent the previous day.

Gold prices logged sharp losses during the week as the Fed indicated more interest rate hikes were needed to curb inflation. Growing fears of a recession were  further compounded by signals from several major central banks that interest rates were far from peaking.

During the week, the Fed delivered a smaller half percentage point rate hike, though it projected a terminal rate of 5.1 per cent next year, higher than previously indicated. The European Central Bank also followed the same direction, raising its policy rate by 50 basis points and signaling more increases in an effort to bring inflation down to sustainable levels.

While gold is considered as a hedge against inflation and economic uncertainty, higher interest rates raise the opportunity cost of holding non-yielding bullion, thereby denting its appeal.

Commenting on gold’s status,Craig Erlam, senior market analyst at OANDA, said it hasn’t been the best week in the end for gold, which appeared to be on the brink of a very bullish breakout following the US inflation data on Tuesday.

“The Fed appeared to put an end to those hopes in the near term and a wave of risk-aversion towards the back end of the week has boosted the dollar and yields, further weighing on the yellow metal,” he added.

Market data show that gold has largely lost its status as a safe haven for most of the year, as rising U.S. interest rates pushed up the opportunity cost of holding non-yielding assets. This saw the dollar largely overtake gold as the market’s favored safe haven.

Some market analysts however opine that if the U.S. enters a deep recession, the Fed will quickly loosen its monetary policies, which will be good for gold.