By The US Federal Reserve meeting outcome later on Wednesday is unlikely to deliver any kind of momentum to gold prices, according to experts.
Gold prices on COMEX slipped below the crucial level of $5,000 per ounce on Wednesday, and have not breached the mark again so far.
Prices had been trading around the $5,000 mark over the last few sessions.
The gold price is struggling to fulfil its role as a safe haven in times of crisis.
The price of gold has dropped by approximately 5% since the war in Iran began two and a half weeks ago.
This decline has been largely attributed to the significant appreciation of the US dollar during the same period, which has acted as a headwind against the gold price.
At the time of writing, the COMEX gold contract was at $4,972.69 per ounce, down 0.7%, while silver was at $79.218 an ounce, down 1%.
Interest rate outlook
However, diminishing hopes for a Fed interest rate cut have spoiled the mood in the market.
As of the close of last week, the Fed Funds futures market indicated that a 25-basis-point rate cut by year-end was no longer being anticipated.
“This means that almost 50 basis points of expected rate cuts have been priced out of the market since the start of the war,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
“This is primarily due to the sharp rise in oil prices and the resulting inflationary risks.”
According to the CME FedWatch tool, the probability of the Fed keeping interest rates steady at its meeting later on Wednesday is a whopping 98.9%.
When interest rates increase, or when the expected number of rate cuts is reduced, the cost of foregoing returns from other assets by holding gold rises.
This trend of investors pulling money out of gold ETFs stands out.
The holdings in Bloomberg-tracked gold ETFs have decreased by 37 tons over the last two weeks, effectively wiping out all the inflows recorded since mid-January.
Fed unlikely to provide any impetus for gold
The key question now is what interest rate outlook the Fed will reveal after the FOMC meeting concludes.
“If the door remains open for interest rate cuts, the gold price could rise again,” Fritsch stated.
However, the Federal Reserve is likely to be cautious about providing a definitive statement regarding the future trajectory of interest rates.
This hesitation stems from the significant uncertainty surrounding how long the war will last and the resulting disruption to global oil supplies.
“The FOMC meeting is therefore unlikely to provide any new impetus for the gold price,” Fritsch noted.
Meanwhile, pending home sales in the US rose by 1.8% in February, according to Tuesday’s data.
This figure substantially outperformed economist forecasts, which had anticipated a 0.6% decline.
Despite this monthly increase, however, the report noted that pending home sales are down 0.8% compared to the previous year.
Expectations of eventual rate cuts by the Fed have been a source of support for the US housing market, contributing to lower mortgage rates.
However, the escalating US-Israel joint conflict with Iran poses a risk of fueling inflation.
This inflationary pressure could compel the US central bank to keep its current neutral monetary policy unchanged throughout the second half of the year, according to economists.
“The slight gain in pending contracts appears to be driven by improved affordability conditions. However, those conditions could reverse if higher oil prices lead to an uptick in mortgage rates,” said NAR Chief Economist Dr. Lawrence Yun.
Gold could slide to $4,200
Gold prices could face significant headwinds if the war in Iran continues for more than the anticipated six weeks, Daniel Pavilonis, senior commodities broker at RJO Futures, told Kitco.com.
In an interview with Kitco News, Pavilonis stated that he anticipates gold and silver will mirror the performance of equities.
Since equities are currently moving inversely to Treasury yields, he predicts that equities will decline in the near future.
He explained that as long as rates continued to go higher—because oil and energy were going higher, because the movement of energy to Europe and Asia was at risk—then he thought the metals sold off with it.
“And if rates sell off, you could see gold and silver go up, and stocks go up. Then, as soon as oil starts moving higher again, you could see everything starts to sell off again.”
Pavilonis issued a warning that “things are going to get ugly before they get better.”
“Can we see a scenario where gold goes back down towards $4,200? I think it’s possible.”
In the short term, gold’s price is being pulled in two directions, balanced between ongoing geopolitical risks and the macroeconomic pressure of higher interest rates.
Looking at the medium term, ING Group maintains a positive view, expecting support from diversification needs, continued central bank purchases, and the increasing risk of stagflation.
“Yet, downside risks persist if the conflict is prolonged, reinforcing a higher-for-longer rates outlook,” Ewa Manthey, commodities strategist at ING Group, said.
“Still, with prices up around 16% year‑to‑date, the pullback so far has been relatively contained. Any deeper correction would likely attract buyers.”
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