Price of Gold Fundamental Daily Forecast – Direction to Be Determined by Rate Hike Expectation Movement

Gold futures are under pressure on Wednesday after a shift in the chances of an aggressive rate hike by the Federal Reserve drove some of the weaker longs to book profits after a week-long rally.

The shift also ignited a massive intraday rise in Treasury yields and a dramatic reversal to the upside in the U.S. Dollar on Tuesday. Dollar-denominated gold tends to weaken when the greenback rises. Furthermore, higher yields tend to weight on non-yielding bullion.

At 09:33 GMT, December Comex gold futures are trading $1782.20, down $7.50 or -0.42%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $164.07, down $0.96 or -0.58%.

Hawkish Fed Member Comments Capping Gains

The gold rally stopped in its tracks on Tuesday after a number of high-ranking Fed officials signaled the need for more aggressive interest rate hikes by the central bank to cool soaring inflation. The comments were strong enough to boost the chances of a more aggressive 75 basis-point rate hike at the Fed’s September meeting.

A trio of Federal Reserve officials – San Francisco Fed President Mary Daly, Chicago Fed President Charles Evans and Cleveland Fed President Loretta Mester – helped drive U.S. Treasury yields higher on Tuesday, while triggering a rebound rally in the dollar and bringing an end to the gold rally.

San Francisco Fed President Daly said her expectation is the Fed will keep raising rates for now and then hold them there “for a while.” She also added, the central bank’s work of bringing down inflation is “nowhere near” almost done and there is still “a long way to go” to lower inflation from four-decade highs.

Chicago Fed President Charles Evans told reporters Tuesday that if inflation does not abate before then, he would back such a move.

“If you really thought things weren’t improving … 50 (basis points) is a reasonable assessment but 75 could also be okay. I doubt that more would be called for,” Evans said.

Cleveland Fed President Mester also struck a similarly hawkish tone. “We have more work to do because we have not seen that turn in inflation,” Mester said in an interview with the Washington Post. “It’s got to be a sustained several months of evidence that inflation has first peaked – we haven’t seen that yet – and that it’s moving down.”

Short-Term Outlook

Since the next Fed meeting isn’t until September 21, the odds of a 50 basis point or 75 basis point rate hike are likely to change from time to time over the next 40 days or so. This raises the possibility of a choppy, two-sided trade in gold over the near-term.

At this time, traders are betting on a 44% chance the Fed will hike by another 75 basis point and a 56% chance of a 50 basis point rate hike.

A rise in the chances of a 75 basis point rate hike will likely keep a lid on gold prices. The faster it rises, however, the more prices could drop. If the odds of a 50 basis point rate hike start to climb then gold prices could be pulled higher.