• Gold has slumped back to test its 200DMA in the low-$1840s having at one point tested its 50DMA near $1880.  
  • Fed tightening bets have amped up since last Friday’s hot US CPI, hurting gold via higher yields/a stronger buck.  
  • The Fed policy announcement on Wednesday is this week’s main event.  

With investors having had a little more time to digest the implications of last Friday’s hotter than forecast May US Consumer Price Inflation (CPI) data and record weak June US Consumer Sentiment figures, spot gold (XAU/USD) prices have experienced an about-face on Monday. Prices were last trading in the low-$1840s and near the 200-Day Moving Average (at $1842), having reversed more than $30 lower versus earlier session highs near $1880, where the 50DMA came into play as resistance.  

Whilst calls for the US to be already in, or on the brink of, recession from analysts on Wall Street are growing louder, something that might normally support safe-haven gold, calls for even faster and more aggressive Fed tightening with CPI at four-decade highs are also growing louder. Some banks have warned that there is a non-negligible chance that the Fed might opt to shock the market with a 75 or even 100 bps rate hike at its policy announcement on Wednesday.  

Whilst a 50 bps rate hike remains the market’s base case scenario, bets are rising for the Fed to have taken interest rates well into restrictive territory (i.e. the upper 3.0s%) by this time next year. These renewed hawkish bets on Monday are pressuring US bonds, which pushes yields higher and benefitting the US dollar, thus creating an unfavourable backdrop for gold prices.  

A rise in yields hurts demand for gold as it represents a rise in the opportunity cost of holding non-yielding assets (like precious metals). Meanwhile, a stronger buck makes USD-denominated commodities (like XAU/USD) more expensive for international buyers, reducing demand. For now, growth/recession fears might be enough to keep gold supported near its 200DMA in the $1840s. US May Retail Sales data out Tuesday might highlight such fears.  

But if the Fed does deliver a big hawkish shock (i.e. a larger than 50 bps rate hike), a test of annual lows under $1800 is on the cards. However, with most analysts now of the opinion that a recession is coming sooner rather than later, gold’s long-term outlook doesn’t look to bad. Looking at the Fed funds futures curve, markets very much remain of the opinion that after some aggressive near-term hiking from the Fed coupled with a recession over the next 12 or so months, US inflation should come eventually come under control, giving the Fed the space to then cut interest rates in the longer-term (which gold bulls want).