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I hope all the gold investors out there are wearing their seatbelts because if this past week is any indication, the price action is going to continue to be a bumpy ride.
Gold bulls were once again caught on the back foot as the Federal Reserve struck a hawkish tone on Wednesday, setting the stage for a rate hike in March and a reduction of its bloated balance sheet before the end of the year.
Following the central bank's monetary policy decision, Fed head Jerome Powell added to the hawkish posturing, saying that the economy and the labor market are in good positions to stand up to potential rate hikes.
"I think there's quite a bit of room to raise interest rates without threatening the labor market," Powell said during this press conference.
The Fed has laid the groundwork and not it looks like the markets have already started to build a flimsy house of cards on it. Markets are now pricing the potential for five rate hikes this year and the potential for a 50-basis point move in March.
The only problem is some economists and analysts are now starting to wonder if the U.S. central bank and markets are being too aggressive, especially as economic conditions continue to weaken. The concern is that aggressively tightening could choke off economic growth this year.
"Fed Chair Jerome Powell fuelled fears of a Ratemaggedon with a hawkish performance in his press conference. But even with both wage and underlying price inflation running at near 40-year highs, we suspect that disappointing real economic growth this year will limit the Fed to 100bp of tightening," said Paul Ashworth, chief U.S. economist at Capital Economics.
Gold price down but not out as Fed looks to raise interest rates soon
Although equities have managed to climb out of a deep hole this week, it is clear that volatility is on the rise, making over-valued markets extremely vulnerable.
This is where gold comes in. While the precious metal has taken a big hit, falling roughly 3% since Wednesday's monetary policy meeting, many commodity analysts are not ready to give up on the precious metal.
Many analysts note that gold is not just a hedge against inflation, which the latest PCE data shows is running at a 40-year high. It is also more than a risk hedge against a wobbly equity market. It is now insurance against a policy mistake from the Fed.
We can see just how robust the gold market is. It is more than just the total sum of the ETF market. Thursday, the World Gold Council reported that despite dismal investor demand for gold-backed exchange-traded products, gold demand grew 10% last year.
While the gold market is down, it is certainly not out. Have a great weekend.
By Neils Christensen
For Kitco News
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