Gold Back Under $1,800 as Fed Fear Gets Better of Market Longs

By Barani Krishnan

Investing.com - Jerome Powell finally got to the long-gold crowd.

Gold futures surrendered their two-week long hold on the $1,800 berth after a second day of squeeze on longs in the market following the Federal Reserve chair’s remarks that the central bank could raise interest rates without worrying about the strength of the U.S. jobs market, so long as it could get inflation under control.

Gold futures’ most active contract on New York’s Comex, February, settled down $36.60, or 2%, at $1,793.10 an ounce. It was the first time since Jan. 11 that the benchmark gold futures contract had gotten below the $1,800 psychological support.

Prior to that, it had scaled a two-month high of $1,854 on Monday, riding on the back of U.S. inflation expanding at four-decade highs.

“Gold has been stuck for months between a rock and hard place made up of the $1,785 support and $1,835 resistance,” said Phillip Streible, precious metals strategist at Blueline Futures in Chicago. “When it got above $1,850 this week, gold longs got excited that they had finally broken new path. Well, the Fed has just proven that that’s not the case.”

Streible said he, however, bought Thursday’s dip in gold “on the belief that we’ll get back to $1,800."

Gold has always been branded as a hedge against inflation while news of rate hikes are typically negative for the yellow metal.

Powell, chairing the January meeting of the Fed’s policy-making Federal Open Market Committee on Wednesday, did not discount the possibility of the Fed raising rates every month once the first pandemic-era hike is in, possibly in March.

The Fed dropped interest rates to virtually zero after the Covid-19 outbreak of March 2020, keeping them at between zero and 0.25% over the past 20 months. Powell and other officials at the central bank say a series of rate hikes will be needed now to curb price prices from trillions of dollars of pandemic relief spending, higher wage payouts and supply chain disruptions.

Prior to its January run, gold had trouble living up to its billing as an inflation hedge as the Dollar Index and U.S. Treasury yields spiked instead on expectations of rate hikes. That appeared to change when the yellow metal broke past the $1,835 resistance more than a week ago and stayed there.

Even with the Fed being hawkish about rates now, some analysts think gold could find new vigor if the U.S. inflation theme remains strong through 2022. In 2020, gold got to record highs above $2,100 came on the back of inflation concerns as the United States began its biggest budget deficit with the onset of the Covid-19.

“Risk aversion will eventually lead to some flows back into bullion, but that won’t happen until this selloff is over,” said Ed Moya, analyst at online trading platform OANDA.