Gold braces for worst week since March 2020 on hawkish Fed

Dollar heads for best week in nine months on potential rate hikes in the US and tapering of quantitative easing

The Fed meeting and reversal in their policy outlook triggered the drop in gold prices. Photo: Reuters

Gold rose on Friday, but was headed for its worst week since March 2020 after the US Federal Reserve’s hawkish message on monetary policy lifted the dollar higher and dented the safe-haven metal’s appeal.

Spot gold was up 0.6 per cent at $1,784.16 per ounce, as of 02.58 GMT (8.58am UAE time). However, prices have fallen nearly 5 per cent so far this week.

US gold futures gained 0.5 per cent to $1,783.20.

It was the Fed meeting and reversal in their policy outlook that triggered the drop in gold prices, Edward Meir, analyst at ED&F Man Capital Markets, said. He added that “the reaction in gold has been somewhat overdone”.

“Despite the current high-growth, inflationary environment, the proposed Fed rate hikes are not expected to set in for at least another 18 months. So after a little bit more weakness here, gold prices will regroup and push higher.”

The Fed on Wednesday signalled it would be considering whether to taper its asset purchase programme meeting by meeting and brought forward projections for the first post-pandemic interest rate hikes into 2023.

Following hawkish comments from Fed officials, the dollar jumped to a two-month high and was on track for its best week in nearly nine months, while US benchmark 10-year yield rose.

Though gold is considered as a hedge against inflation, higher interest rates will reduce its appeal as they translate into a higher opportunity cost of holding the asset.

Indicative of sentiment, holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, fell 0.4 per cent to 1,041.99 tonnes on Thursday.

Palladium gained 1 per cent to $2,521.38 per ounce, but was on track for its worst week since late March following a sharp drop on Thursday.

Silver rose 1.1 per cent to $26.12 per ounce but was down 6 per cent for the week. Platinum climbed 1 per cent to $1,069.03.