Gold extended its decline after the biggest drop in five months as the Federal Reserve sped up its expected pace of policy tightening amid optimism about the labour market and heightened concerns over inflation.
Fed Chair Jerome Powell said on Wednesday that officials would begin a discussion about scaling back bond purchases used to support financial markets and the economy during the pandemic. It’s the first major hawkish turn from the central bank whose deluge of stimulus has been critical to bullion’s strong performance since the start of the pandemic.
The central bank also released forecasts that show they anticipate two interest-rate increases by the end of 2023 — sooner than many thought — which helped boost the dollar and US bond yields, hurting gold. The currency continued to edge higher on Thursday, further pressuring the metal. More dollar strength going forward could undermine a key support for bullion.
“We have a negative outlook, expecting gold to fall to $1,600 an ounce over the next six to 12 months,” said Giovanni Staunovo, an analyst at UBS Group AG. “At some point the Fed will not talk about taper but also implement it.”
Bullion’s is at a six-week low as investors weigh the outcome of the Fed’s two-day gathering. Despite the hawkish pivot, Powell said the interest-rate forecasts “should be taken with a big grain of salt,” and cautioned that discussions about raising rates would be “highly premature.” The central bank also upped its inflation forecasts, which if not curbed by monetary tightening should benefit gold.
“If the economic recovery that is just beginning leads to further rising prices, this should also support the yellow metal,” said Alexander Zumpfe, senior precious metals trader at refiner Heraeus. “This is all the more true as long as real interest rates,” are negative, he added.
Spot gold declined 0.3% to $1 805.89 at 10:11 a.m. in London, after earlier tumbling to $1 802.86, the lowest intraday level since May 6. Silver, platinum and palladium also declined. The Bloomberg Dollar Spot Index gained 0.3% after rising 0.9% on Wednesday.