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Gold Skids as Fed Cools Heads Over Rate Cut

Published 26/06/2019, 19:32
Updated 26/06/2019, 20:11
© Reuters.

© Reuters.

By Barani Krishnan

Investing.com - It had to come at some point, and the biggest monthly gain in three years seemed a good enough point for the gold market.

Gold’s magical June run seems to have hit the brakes a day after two of the Federal Reserve’s senior most bankers cooled the market’s ardor for rate-cut expectations by giving no guarantee for an easing next month, let alone a big one at that.

Spot gold, reflective of trades in bullion, traded at $1,412.24 per ounce by 2:00 PM ET (18:00 GMT), down $11.14, or 0.8%, on the day. It was the second negative day in a row for bullion, after seven consecutive days of gains prior. On Tuesday, the spot price of gold had one last hurrah, reaching $1,438.99, its highest since May 2013. It later turned lower. But even with the slide of the past two sessions, bullion still carried a gain of 8.8%, its most since June 2016.

Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled Tuesday’s trade down $3.30, or 0.2%, at $1,415.40 per ounce. On Tuesday, it peaked at $1,442.15, its highest since Feb 2014. For the week, the gold futures contract remained up 1.3%. For the month, it showed a gain of 8.4%. also the most since June 2016.

Federal Reserve Chairman Jerome Powell said in a speech on Tuesday the central bank would be accommodative to reshaping its rate policy to ensure continuity of the growth of the U.S. economy. But he emphasized that politics won’t be a consideration in its decision, a veiled reference to pressure from President Donald Trump on the Fed over the past year to cut rates.

Additionally, St. Louis Fed President James Bullard said in an interview with Bloomberg Television that he didn’t see the necessity of a half-point, or 50 basis points, rate cut.

A half-point rate cut by as early as next month is what many bullish investors think is needed to continue feeding the rally in gold.

“Investors are not in the least bit enamored by Fed speak overnight as they were hoping for a bigger bang for their investment buck that the Feds would slash the fund's rates by 50bp July,” said Stephen Innes, head of commodities trading at OANDA in Singapore.

But other analysts are looking beyond, to the many standoffs that the United States has engaged with that could keep gold supported at around $1,400 and even help stage a later breakout toward $1,450.

“Everywhere you look, from South America to China and the Middle East, the United States is engaged in political battles and you need a hedge for that,” George Gero of RBC Wealth Management in New York said in an interview with Investing.com on Tuesday.

Another thing that could support gold is the troubled relationship between Trump and Powell.

Indeed, if the Fed opts for a smaller-than-expected rate cut, of say 25 basis points, it will probably amplify Trump’s criticism of both the central bank and the Fed chairman. There's talk the president might have Powell removed, although the Fed governor's actual term would go on. (The legality of such a move is not entirely clear.)

But a crisis of such magnitude at the Fed is likely to spark a safety flight to gold.

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