A ‘tough pill to swallow’: Gold prices fall as markets bet on the June Fed rate outcome

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(Kitco News) The gold market saw another day of big losses on Thursday, with prices dropping nearly $30 on a stronger US dollar, improving risk sentiment, and investors not ruling out another Fed rate hike in June.

June Comex gold futures fell 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 about 7%.

Analysts warn that if the price of $1,950 an ounce fails, gold is at risk of further losses.

One of the big drivers driving gold lower is the strength of the US dollar. The Dollar is resorting to trying to get soft US macro data, which is forcing the market to re-price Fed rate hike expectations. CME FedWatch now sees a 38% chance of another 25bp rate hike in June.

“The hard pill to swallow is that US economic data continues to fall in line with expectations. It shows a bigger result of a soft landing. Meanwhile, foreign economic data is coming out weaker than expected. That’s why the dollar is weaker than expected,” said Philip Striple, chief market strategist at Blue Line Futures, per Kitco News, “The index is picking up a bid at the moment.”

The US Dollar Index was last trading at 103.58, up 0.68% on the day.

During the May meeting, Federal Reserve Chairman Jerome Powell signaled a possible pause in the aggressive monetary tightening cycle, which has seen interest rates rise by 5% in just over a year.

However, many Fed speakers who followed Powell remained relatively bullish, forcing markets to reset June rate expectations and driving hopes of a year-end rate cut.

James Bullard, President of the Federal Reserve Bank of St. Louis, told the Financial Times on Thursday that inflation in the US is not cooling down fast enough for the Fed to hit the pause button.

“I do expect inflation to decline, but it’s been slower than I would have liked, and it might take some insurance by raising interest rates a bit to make sure we really get inflation under control,” Bullard said. “The main risk we have is that inflation does not go down or even shift but rather goes up, as it did in the 1970s.”

Dallas Federal Reserve Chairman Lori Logan also said Thursday that it’s too early for the Fed to stop.

“After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we’ve made some progress,” Logan said. “Data in the coming weeks may show that it is appropriate to skip a meeting. Even today, though, we’re not quite there yet.”

This week’s macro data supports that view, Streible noted. “It drives expectations when the Fed starts its first rate cut. That weighs on gold,” he said.

As of now, it is too early to call a gold bottom. But the first thing that should happen is to hold $1,950 an ounce, Frank Cooley, senior market analyst at RJO Futures, told Kitco News.

“We could be very close to the bottom. We took some nice levels, and it started around $2,000. The downside is limited now, regardless of what happens with the debt ceiling. Even if the deal does happen this weekend, gold is likely to settle down.”

Choli added that the precious metal is looking at some sideways price action as there is no catalyst to push prices above $2,000 an ounce for the time being unless we see a rise in default risk.

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

But so far, there is hope that the negotiations will produce results in due time, according to the latest statements of US President Joe Biden and Speaker of the House of Representatives Kevin McCarthy.

Cooley also does not rule out another 25 basis point increase in June. “Right now, it’s still 50/50 on whether we get another 25 basis points at the next meeting. We’re seeing prices go up,” Choley said. “Gold will not respond well to that.”

Gold has also been overbought in the past few weeks, which partly explains the speed of the recent decline. “Investors are taking some of the top,” Sean Lusk, co-director of Walsh Trading, told Kitco News. “At the end of February, gold was at $1,827 for the June contract. Then it rose to $2,085. We could give up another $10 as the weak longs exit.”

Lusk is also watching the $1,950 an ounce level. If it fails, gold could look to $1920. “There was a lot of news and gluttony that the Fed might cut interest rates back at the end of the year. Now that’s being corrected,” he said.