What’s in store for gold prices as the Fed meeting approaches?

Comments from the US Federal Reserve between Monday and Wednesday will bring volatile moves for the dollar index, which will move the gold price

Gold prices reached their peak in April when the price touched the highs of $2,079. Reuters

Gold traders are concerned about the future price movement as the current upwards trend has started to look somewhat valuable.

The coming week has a strong potential to repair the current momentum in gold prices, or it could take further wind out of it, which means that we could see the price collapse.

Prices reached their peak in April when they touched the highs of $2,079, and interestingly, it happened at a time when the US banking system came up against another major threat.

At that time, the threat came from the US Federal Reserve’s monetary policy action rather than the previous one, when banks started to sell mortgage-backed assets to clients that had little to no value.

Gold traders were heavily optimistic about the gold price surging to record highs when the Russia-Ukraine war began; the thought at the time was that we would see a massive rally in gold and Bitcoin prices, as both of them are considered safe haven assets.

However, the geopolitical events failed to push the prices to record highs, dampening all the optimism in terms of safe haven assets, and this is because smart money knew at that time that this event was going to be contained despite some detrimental impact.

The collapse of some of the US regional banks sent alarm bells ringing throughout the world, and it provided massive tailwinds for the gold price. The Fed at the time had a strong hawkish stance as inflation was running hot and there were strong chances that it would continue to raise rates as it had little to no other option if it wanted to control inflation.

The situation, however, has changed significantly since, and inflation has not only dropped from its record level – we also saw the US inflation reading nearing the 3 per cent level last week, which is now only one percentage point away from the Fed’s desired level.

This means that there is less pressure on the Fed to continue with its hawkish monetary policy. And gold traders are now looking at the most important event that will unfold on Wednesday, when the Fed will announce its monetary policy decision, which will have a massive influence on the gold price.

Gold traders are likely to remain glued to their screens next week, as any data or comments from the Fed between Monday and Wednesday will bring volatile moves for the dollar index, which will move the gold price.

Going into the meeting, the general anticipation among traders is that the Fed will increase the interest rate two more times this year, and each time it will increase the interest rate by 25 basis points.

So basically, this means that another interest rate rise of 50 basis points in total and 25 basis points next week will take place, which means that the gold price is likely to move lower.

However, I believe that the Fed is going to be very much done with its interest rate-raising cycle on Wednesday, when it will be announcing the last interest rate increase of 25 basis points and taking the rest of the year off.

This is because its hard work has paid off to a large degree, and now it is time to sit and wait. The Fed will leave the room open to act if inflation readings begin to move in an undesirable direction or do not continue to move in the expected direction.

Labour market data continues to support the fact that the Fed can take more risks by being hawkish.

As the market is expecting two interest rate increases, the gold price is unlikely to show significant movement on the back of an anticipated 25 basis point interest rate rise. A meaningful movement will only take place if the Fed shows its hawkish tilt in the commentary, which means that the gold price could test the support of $1,900 or even $1,860.

However, the absence of the hawkish tilt could support the gold price rally, and we could see the price testing the level of $2,000.

There is another important point to keep in mind, and that is when the dust will settle. It is highly possible that the Fed increases the rate by 25 basis points and keeps the hawkish tilt, which may hamper the rally in the gold price.

But that could be an opportunity to bag some bargains, as the data from there on is going to dictate what the Fed will do. And the fact that inflation numbers are improving – and if they continue to improve – we could see some early signs emerging in terms of comments from Fed officials that would indicate no need for further rate increases.

Naeem Aslam is chief investment officer at Zaye Capital Markets