Price of Gold Fundamental Weekly Forecast – Faster Tapering, Slower Rate Hike Expectations Supporting Gold

Gold finished higher last week in a volatile trade. Surprisingly, the source of the volatility wasn’t inflation as some headline writers would like you to believe, but rather the Federal Reserve, in my opinion.

While the decision by the Fed to increase the pace of tapering and raise rates was widely expected, investors didn’t expect policymakers to announce as many as three rate raises.

However, that’s not the issue. While the pace of tapering was a major concern for weeks leading up to last Wednesday’s monetary policy announcements, the pace at which the Fed will raise interest rates is now a cause of concern.

Last week, February Comex gold settled at $1804.90, up $20.10 or +1.13%. The SPDR Gold Shares ETF (GLD) finished at $167.81, down $0.35 or -0.21%.

Fed to Speed Up Tapering Pace, Forecasts Three Rate Hikes Next Year

The Federal Reserve provided multiple indications last Wednesday that its run of ultra-easy policy since the beginning of the Covid pandemic is coming to a close, making aggressive policy moves in response to rising inflation.

For one, the central bank said it will accelerate the reduction of its monthly bond purchases.

The Fed will be buying $60 billion of bonds each month starting in January, half the level prior to the November taper and $30 billion less than it had been buying in December. The Fed was tapering by $15 billion a month in November, doubled that in December, then will accelerate the reduction further come 2022.

After that wraps up, in late winter or early spring, the central bank expects to start raising interest rates, which were held steady at last week’s meeting.

Projections released Wednesday indicate that Fed officials see as many as three rate hikes coming in 2022, with two in the following year and two more in 2024.

Gold Rallies Despite Hawkish Fed

“Sell the Rumor, Buy the Fact”, Relatively Cheap Prices, Inflation Still Out of Control, Rising Omicron Worries – Those are some of the reasons being cited for last week’s rally in gold after the Fed announced a hawkish strategy.

Of course, there isn’t just one right answer. At first glance, I blamed “Sell the Rumor, Buy the Fact”. But after watching the price action in the Treasury yields and particularly the Treasury Yield Curve, I reached the conclusion that the volatile price action was fueled by aggressive position adjusting in the Treasury markets.

It would have been easy to follow the Fed headlines calling for three rate hikes and just sell Treasurys. This would have sent yields higher and gold prices lower. But it’s more complicated than that.

Treasury investors and consequently gold investors are now paying closer attention to when the Fed will raise rates perhaps as much as three times.

Traders now interpret it to mean the Fed will have a lot more time to decide when to raise rates three times in 2022. This is causing investors to make adjustments to their portfolios to reflect a slower pace of rate hikes, which is helping to underpin gold prices.

Moving forward just remember this:  Faster tapering, faster rate hikes will be bearish for the gold. Faster tapering and slower rate hikes will underpin gold prices, but I wouldn’t call it bullish.