‘Tough pill to swallow’: Gold price plunges as markets bet on Fed’s June rate outcome

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(Kitco News)
The gold market saw another day of significant losses Thursday, with prices dragged down nearly $30 due to a stronger U.S. dollar, improved risk sentiment, and investors not ruling out another Federal Reserve rate hike in June.

June Comex gold futures tumbled over $120 after testing record highs of $2,085 an ounce just two weeks ago. June futures were last at $1,959.30, down 1.29% on the day. Year-to-date, gold is still up around 7%.

Analysts warn that if $1,950 an ounce fails to hold, gold is at risk of more losses.

Big drivers pushing gold down include a strong U.S. dollar. The greenback is catching a bid on resilient U.S. macro data, which is forcing the market to re-price its Fed rate hike expectations. The CME FedWatch Tool now sees a 38% chance of another 25-basis-point rate increase in June.

“The tough pill to swallow is that the U.S. economic data continues to come in line with expectations. It shows a greater outcome for a soft landing. At the same time, foreign economic data is coming out weaker than expected. That is why the dollar index is catching a bid right now,” Blue Line Futures chief market strategist Phillip Streible told Kitco News.

The U.S. dollar index was last at 103.58, up 0.68% on the day.

During the May meeting, Fed Chair Jerome Powell signaled a potential pause in the aggressive monetary policy tightening cycle, which saw rates climb 5% in just over a year.

However, many Fed speakers that followed Powell remained relatively hawkish, forcing markets to recalibrate the June rate expectations and push back on the year-end rate cut hopes.

Inflation in the U.S. is not cooling fast enough for the Fed to hit the pause button, St. Louis Fed President James Bullard told the Financial Times Thursday.

“I do expect disinflation, but it’s been slower than I would have liked, and it may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control,” Bullard said. “Our main risk is that inflation doesn’t go down or even turns around and goes higher, as it did in the 1970s.”

Dallas Fed President Lorie Logan also said Thursday that it is too early for the Fed to pause.

“After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress,” Logan said. “The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”

And this week’s macro data supports this view, noted Streible. “It pushes out expectations when the Fed will initiate the first rate cut. And that is weighing on gold,” he said.

As of now, it is too soon to call a bottom in gold. But the first thing that needs to happen is for $1,950 an ounce to hold, RJO Futures senior market strategist Frank Cholly told Kitco News.

“We could be very close to the bottom. We have taken out some good levels, and it started right around $2,000. The downside becomes limited now, regardless of what happens with the debt ceiling. Even if the deal is struck this weekend, gold will likely stabilize,” Cholly said.

The precious metal is looking at some sideways price action as there is no catalyst to take prices above $2,000 an ounce right now unless we see a high risk of default, Cholly added.

“Gold might need a U.S. default to get it back above $2,000. I don’t think we’ll see that. But there is enough stubbornness here between parties that we can see that safe haven trade come back,” he said.

But so far, there is hope that negotiations will yield results in time, according to the latest statements from U.S. President Joe Biden and House Speaker Kevin McCarthy.

Cholly is also not ruling out another 25-basis-point hike in June. “Right now, it is still 50/50 on whether we get another 25 bps at the next meeting. We see rates ticking up,” Cholly said. “Gold is not going to respond well to that.”

Gold was also overbought in the last few weeks, partly explaining the speed of the latest pullback. “Investors are taking some off the top,” Walsh Trading co-director Sean Lusk told Kitco News. “At the end of February, gold was at $1,827 on the June contract. And then it went up to $2,085. We could drop another $10 as weak longs get out.”

Lusk also watches the $1,950-an-ounce level. If it fails, gold could be looking at $1,920. “There was a lot of news and over-exuberance that the Fed could go back to cutting rates at the end of the year. Now that is correcting,” he said.