Gold price rallies $33 ahead of Fed decision, gets ready to test all-time highs

(Kitco News)
Whether or not gold tests its all-time highs this week depends on the Federal Reserve’s messaging on Wednesday, according to analysts.

Markets are pricing in a nearly 90% chance of another 25-basis-point hike from the Fed. But gold is looking past this May rate hike, with recent macro data showing sufficient signs of cooling to warrant a pause in the fastest rate-raising cycle in 40 years.

The latest round of JOLTS numbers showed that job openings in the U.S. declined to a near two-year low of 9.6 million in March. Also, the ratio of job openings to unemployed people edged down to 1.6 in March — the lowest level since October 2021. The Federal Reserve likes to watch this ratio, citing its elevated levels to justify rate increases.

“Even without a rise in the unemployment rate, labour market conditions are nevertheless easing and are consistent with a more marked slowdown in wage growth soon,” said Capital Economics chief North America economist Paul Ashworth.

In response to the data, gold jumped Tuesday, rising comfortably above $2,000 an ounce. June Comex gold futures were last trading at $2,025.10, up $33 on the day.

With data starting to support a rate pause and the banking turmoil still fresh with the collapse of First Republic, gold’s move higher depends on Fed Chair Jerome Powell’s messaging and what he says about the state of the banking sector.

“During the GFC, >150 banks went out of business vs ‘only’ 4 failures today, but those bank failures today already equate to all the assets financial institutions held during the 2008-09 banking,” said MKS PAMP’s head of metals strategy Nicky Shiels. “More bank failures and thus more policy backstops & bailouts accelerates the 60/40 portfolio rethink and the need for some alternative asset exposure.”

Focusing on Fed’s language, Shiels said to look for a change in the phrase from March FOMC from “some additional policy firming may be appropriate” to something broader.

“The degree and resiliency in gold trading/dips is indicative that the market will likely try and search through for any dovish interpretations,” Shiels said.

The 0.25% rate hike on Wednesday will take the fed funds rate to 5.00-5.25%, which is a symbolic range, said ABN AMRO’s senior economist Bill Diviney.

“It is roughly the peak the fed funds rate reached in 2006-8, prior to the global financial crisis,” Diviney noted. “With no update to the ‘dots’ projections at this meeting, the focus for markets will be on any changes to the policy statement, and Chair Powell’s remarks at the press conference.”

It is very unlikely that the Fed will signal an end to the tightening cycle in the policy statement itself, the economist added. “In both the most recent tightening cycles, the final hike was accompanied with a statement suggesting an openness to further rate hikes,” Diviney said.

This is what happened in December 2018 and in June 2006. “We expect similar language in the May policy statement, perhaps even repeating verbatim the language of the March statement,” he said.

For gold, Fed’s messaging will determine whether there is another run to record highs of around $2,070 an ounce, said OANDA senior market analyst Craig Erlam.

“The Fed must be concerned about the tightening of credit conditions in the aftermath of the collapse of three banks, but it clearly doesn’t want to soften its rhetoric until it has to,” Erlam said Tuesday. “The result could be a sharp, sudden pivot from a policy perspective over the coming months, but as far as tomorrow is concerned, a ‘wait-and-see’ or ‘meeting-by-meeting’ approach may be preferred.”