Metals Stocks: Gold futures head 1% lower as dollar surges after Fed points to start of rate hikes in March

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Gold futures traded sharply lower Thursday morning, as the U.S. dollar popped higher a day after the U.S. Federal Reserve signaled that it would soon be appropriate to raise interest rates as soon as March.

“Speaking at the end of a two-day gathering, the Fed’s chairman gave clear indications of a commitment to tighten monetary policies to bring inflation under control, which led the markets to price in 200 basis points worth of rate hikes in 2022,” wrote Ricardo Evangelista, senior analyst at ActivTrades, in a Thursday note.

“Such a scenario is obviously supportive for the dollar and therefore penalizes gold, due to the inverted correlation between the two assets,” the analyst wrote. The U.S. dollar was up 1.1% on the session, as measured by the ICE U.S. Dollar Index
DXY,
+1.17%
,
marching to its highest level since around 2020.

On Thursday, February gold
GCG22,
-1.14%

GC00,
-1.14%

traded $17.70, or 1%, lower to reach $1,812 an ounce, following a 1.2% decline on Wednesday, marking the lowest finish since Jan. 18.

Gold is priced in dollars and tends to fall as the U.S. currency rises, because a higher value for the buck can make buying bullion more expensive for overseas investors.

The currency market is more buoyant on the prospect of elevated rates.

Fed Chairman Jerome Powell at a Wednesday news conference to discuss the central bank’s updated policy statement didn’t reject the notion it could increase interest rates at each of its meetings in 2022, and talked of the need to be “nimble.” Powell also said there was “quite a bit of room to raise rates without hurting jobs.”

That sets up a bearish scenario for nonyielding precious metals, with the prospect of rates extending their rise and competing against bullion for safe-haven demand.

Chintan Karnani, director of research at Insignia Consultants, said that gold needs to trade between the $1,796-$1,803 zone to rise to $1,831.10 and $1,853.60 an ounce.

He warned that bullion could face a technical breakdown if “gold trades below the $1,796-$1,803 zone only.”

Meanwhile, silver for March delivery
SIH22,
-3.05%

was trading 58 cents, or 2.4%, lower at $23.24 an ounce, after shedding 0.4% on Tuesday.

Concerns about conflict in Western Russia, however, may limit declines for precious metals, which tend to rise amid heightened geopolitical risk.

A buildup of Russian troops at the border with Ukraine in recent months is threatening to devolve into a military clash that could ripple across parts of the globe.

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