Spot gold is expected to close October down 1.4% on the month, its seventh straight monthly decline — something not seen since 1968. Year-to-date, gold is down about 10%. Since the end of March, gold has fallen more than 15%.
After peaking above $2,000 an ounce in March following Russia’s invasion of Ukraine, gold has struggled to hold on to any fresh gains. It traded mostly bearish, with a strong US dollar and higher Treasury yields weighing on the precious metal.
While many continue to discuss a Fed pivot or at least a possibility of a slowdown in the coming months, the US central bank remains on track for another outsized rate hike this Wednesday.
Goldman Sachs’ latest note shows the Fed raising interest rates to 5%, higher than the bank’s previous estimate. At the last meeting, Fed forecasts showed interest rates rising 4.4% this year and 4.6% next year.
After this week’s meeting, the Fed would have raised rates by 375 basis points this year, taking the federal funds rate to 3.75%-4%.
Goldman estimates rates will rise by 75 bps this week, 50 bps in December and 25 bps in February and March. He also added that “uncomfortably high” inflation, the need for slower economic growth and concerns about premature easing are the main reasons the Fed could continue to tighten policy after February.
Meanwhile, as the Fed continues to slow the economy, the risk of a recession is rising. A recession in the US and Europe is highly likely, JPMorgan Chase CEO Jamie Dimon and Goldman Sachs CEO David Solomon said last week.
“We will probably have a recession in the US [and] we’re going to have, I think, probably a recession in Europe,” Solomon said during a panel discussion at the Future Investment Initiative conference in Riyadh. “There’s no question that economic conditions, in my opinion, are going to get tighter from here.”
With the Fed announcement just under 48 hours away, the key question is whether the central bank will slow after the November meeting. A shift to a slower pace of interest rate hikes would be positive for gold, which is why some analysts are becoming more bullish on the precious metal.
“The Fed is going to pull back from such aggressive hikes. There could be talk of a walkout at the next meeting,” RJO Futures senior trader Daniel Pavilonis told Kitco News. “Gold is not priced very well in dollar terms. If we see the dollar pull away, gold can do very well.”
Since the Fed has been too quick with its rate hikes, it could be ready to “let the pieces fall and see where they land,” Pavilonis added.
However, many analysts remain cautious, noting that markets are overestimating the Fed’s pivot. “[The] The press conference will be closely watched, but we expect President Powell to maintain the aggressive tone consistently maintained by Jackson Hole in late August. We don’t think it’s going to give the markets what they’re looking for, which is some indication of a turnaround. After the decision, Fed officials will move to spread the message,” said BBH Global Currency Strategy head Win Thin.
The bar for a Fed pivot is quite high, added ING global head of markets Chris Turner. “We believe it is too early to call time on the dollar rally. After all, the market is, in fact, already pricing in the pivot (pricing 75bp this week and 50bp in December) and we suspect the potential for another 75 bp The increase in December is underestimated.”
This year, persistently high inflation coupled with continued dollar strength has led to strong gold ETF outflows. That was somewhat offset by strong demand in the physical market, according to Suki Cooper, executive director of precious metals research at Standard Chartered.
For the rest of the year, Cooper said it looks for continued gold-backed ETF outflows for the rest of the year, which will weigh on prices. Next year, Standard Chartered is looking for a small net inflow. “The turning point comes when the Fed rotates. Dollar strength is likely to remain in the coming months,” he said during a webinar last week.
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