Gold Price Struggles With the Fed

The latest macro events suggest Fed will be hiking more and for longer, boosting the dollar and hurting the appetite for gold.

What's Keeping Gold From Rising

US Q4 GDP was revised slightly on Thursday to 2.7% from the 2.9% initially reported. The change was due to a downward revision in consumer spending. However, it affirmed the impression that the US economy remains resilient for now, meaning the Fed has less reason to ease up on the hiking, which works against the appetite for gold.

But the report was simply the latest in a series of events that have led investors to think there will be higher rates than anticipated. Minutes from the FOMC showed that members did consider a larger rate hike. Before that, two Fed officials had suggested that a "double" rate hike could be in the cards. The number of economists expecting 50bps in March is still a minority but continues to climb slowly.

What Might Allow Gold to Rise

With interest rate expectations supporting the dollar, gold struggles to gain traction in the short term. However, worries about a recession later in the year could finally boost the yellow metal. The economy is resilient enough to keep the Fed hiking, but too much tightening could cause the economy to falter. GDP figures continue to be supported by a shrinking trade deficit, which would typically be seen as positive. Except now, it's driven by slower domestic demand, as real wages continue declining due to inflation.

The Fed insists that the US can avoid a recession. With its yield curve at the widest it's been in 40 years, the bond market disagrees. Just because the economy seems to be doing well now, it doesn't mean it will stay buoyant for the rest of the year. Gold bulls might also take some solace in that the debate around the debt ceiling might provide some market uncertainty and drive investors towards gold.

Gold in Long-Term Flag Pattern

The long-term price action for gold indicates that prices remain in a bearish flag. The recent failure to reach the top of the pattern near 2050 and a subsequent drop could offer an attempt towards the opposite side near 1600 again. Only respite? A new record high, confirming the completion of the flag down at the swing low. But under 1915, it remains a distant wish.

Short-term, the 1800 handle seems attractive for both bulls and bears, being a highly active level. A bounce could send prices towards the critical resistance of 1915 unless bulls fail to defend the support, opening the door to 1740 and perhaps lower.

Key Takeaways

Gold price is struggling due to the Fed's expectation of further rate hikes. Recent data showcases that the US economy is resilient, supporting this expectation. Although there is a chance of a recession in the future due to too much tightening, the Fed insists it could be avoided. The bond market shows the opposite, raising doubt about the sustainability of growth. Market uncertainty from the debt ceiling could provide a potential boost for gold until and if the recession is in.