Market Outlook

Gold Extends Drop After Hawkish Powell Wipes Out Year’s Gains

(Bloomberg) — Gold extended losses — after falling the most in two months — as a more hawkish-than-expected U.S. Federal Reserve underscored the central bank’s aggressive approach to tackling inflation.

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A stronger dollar on Thursday pressured bullion, which plunged 1.5% Wednesday, as Fed Chair Jerome Powell didn’t rule out raising interest rates at every meeting to rein in the fastest inflation in a generation. Money markets are now fully pricing in five Fed hikes this year, pushing interest rates to 1.5% by year-end.

See More: Powell Backs March Liftoff, Won’t Rule Out Hike Every Meeting

The tumble wiped out gold’s gains so far this year that were driven by investor bets for inflation continuing to outpace bond returns, even with rate hikes expected. The hawkish pivot has challenged that narrative, with 10-year real U.S. bond yields spiking to the highest close in 19 months after Powell’s speech.

“The market will remain nervous until yields and the dollar settle down,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “In the short term, the market will be looking for support in the $1,805-to-$1,800 an ounce area.”

On Thursday, real yields eased slightly, underlining the uncertainty in the outlook for monetary policy with the global economy still facing headwinds from Covid-19. Data showed that U.S. GDP growth topped estimates last quarter, while weekly jobless claims fell faster than expected.

Goldman Sachs Group Inc. raised its 12-month outlook for gold to $2,150 from $2,000 following Powell’s comments, on expectations for slower U.S. growth, a rebound in emerging markets excluding China and faster inflation.

“This combination of slower growth and higher inflation should generate investment demand for gold, which we consider to be a defensive inflation hedge,” analysts including Mikhail Sprogis wrote in a note.

Spot gold fell 0.9% to $1,802.41 an ounce by 2:12 p.m. in London, and touched the lowest since Jan. 10. The Bloomberg Dollar Spot Index rose 0.6%, extending recent gains. Silver, platinum and palladium all dropped.

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