Gold Price Fundamental Weekly Forecast – Market to Weaken as Traders Eye 5% Fed Policy Rate

Gold futures took a hit last week with most of the losses coming on Thursday and Friday as a higher-than-expected rise in U.S. September inflation cemented bets the Federal Reserve will continue on a path of aggressive interest rate hikes and a rise in inflation expectations signaled the rate hikes could continue for a lot longer than previously expected.

Last week, December Comex gold futures settled at $1648.90, down $60.40 or -3.66%. The SPDR Gold Shares ETF (GLD) closed at $152.98, down $4.90 or -3.20%.

Gold to Weaken as Fed Seen Ramping Up Interest Rate Hikes

Gold prices are expected to remain until pressure for several more months amid speculation the Federal Reserve will continue to deliver another large interest rate hike on November 2. Furthermore, it is seen ultimately lifting rates to 4.75%-5% by early next year, if not further, after a government report showed inflation remained stubbornly hot last month.

According to the pricing in the U.S. interest-rate futures market, traders piled into fresh bets on an even more aggressive Fed, even pricing in a one-in-three chance that the Fed drives the policy rate above 5% next year, after a Labor Department report showed the consumer price index jumped 0.4% in September from August. From a year earlier, prices rose 8.2%, far above the Fed’s 2% target.

Ahead of the CPI report, traders had all but priced in a fourth straight 75-basis point hike at the close of the Fed’s November 1-2 meeting. As of Friday’s close, the odds of this big rate hike had jumped to 97.2%. Furthermore, late last week, traders even toyed with the idea of a 100-basis point rate hike.

More importantly for gold traders, the Fed’s policy rate is currently 3% – 3.25%. However, by year end, traders now expect the rate to reach 4.5%-4.75% and perhaps 4.85% by March 2023.

The Fed may not even stop there either. Futures prices also reflect about a 35% probability of rates rising above 5%.

“Broadly speaking, we see this as supporting our call for a terminal rate of 5% to 5.25%,” wrote LH Meyer from Monetary Policy Analytics, higher than Fed policymakers had themselves signaled just three weeks ago, “higher than markets have been pricing, and higher than markets are pricing even after this report.”

Weekly Outlook

If you believe the economists and the market have been low-balling inflation and the level at which the Fed will stop raising rates then you have to believe that gold investors may be overpricing the precious metal.

Gold is an investment, it’s not a safe-haven. If it was, prices would be a lot higher because of the war in Ukraine. Additionally, last week’s near financial debacle in the UK gilt market would have sent investors into gold for protection. Instead they bought the U.S. Dollar.

As an investment, gold competes with other investments like stocks and bonds. Gold is a non-yielding assets, meaning it doesn’t pay interest nor a dividend to hold it.

As U.S. interest rates rise, investors are going to continue to sell gold and move their proceeds into government bonds to capture the higher yields. They want to get paid and gold doesn’t pay them. Especially with potentially huge risks to the downside.