Bulls Still Control Gold Price Ahead Of Fed’s Rate Decision

The gold index (XAU/USD) has rallied on Tuesday, adding around 0.5% to the scale after climbing from a low of $1,834.95 to a high of $1,853.88 so far. The US dollar has come under pressure after reaching a two-week peak over tensions between Russia and the West. However, there was a five-year Treasury auction that has weighed on the US dollar considering the bond market’s appetite for US Treasury bonds at the current coupon.

The anguish in central Asia took a back seat today to pave the way for the outcome of the Federal Open Market Committee’s two-day meeting that draws to a close on Wednesday. Investor were expecting the Fed to announce the end of QE prematurely and signal a readiness to hike in March.

In turn, there was a focus on today’s 5-year Treasury auction. The bid-to cover ratio was high and so too was the yield with the US selling 5-year notes at 1.533% vs WI 1.547%on a $55 billion sale. That was the highest yield since October 2019. The prior was 1.263% and the bid to cover at 2.50 vs 2.41 prior. This indicates that the market could be pricing the Fed too hawkish for the medium term. This is a bullish theme for gold.

Moreover, markets will be looking to take profit in the Fed which could be playing out in the US dollar as the month end is looming. Given the recent rout in markets, a growing cohort of participants will be hoping that the Fed will manage to provide a soothing tone for markets.

Considering that Chair Powell’s primary goal is to prevent a de-anchoring of inflation expectations, it is unlikely that the Fed will pivot from their plan to start hiking rates as soon as March, and start quantitative tightening soon after. Certainly, markets have priced-in a March hike for some time, which takes the sting out of this form of tightening, but participants have begun to question whether the strike on the Fed’s put is further from the market in a regime where the central bank is battling inflation.

Evidence that quantitative tightening might be more impactful for asset prices suggests that the Fed could still eventually use this tool to manage the strike on its put, without necessarily causing undue harm to its primary objective of keeping inflation expectations bounded. For precious metals, this signals few immediate avenues for relief.

While gold ETFs recorded massive inflows, these may have been distorted by options-related activity, with the concurrent rise in volatility suggesting only some additional safe-haven flows. The evidence continues to point to Chinese purchases as the single largest source of inflows, which are vulnerable with Lunar New Year around the corner. CTA trend followers are set to liquidate some gold length should prices break below $1815 per ounce.