Gold spooked by hawkish Fed outlook despite smaller rate hike

By Ambar Warrick

Investing.com-- Gold prices fell on Thursday after the Federal Reserve struck a more hawkish chord than markets were expecting, with the outlook for the yellow metal remaining uncertain on the prospect of higher U.S. interest rates.

Still, bullion prices marked a strong rally this week, clearing the key $1,800 resistance level after data showed U.S. inflation eased further in November.

Spot gold fell 0.4% to $1,800.79 an ounce, while gold futures fell 0.4% to $1,811.35 an ounce by 20:46 ET (01:46 GMT). Both instruments were still trading up 0.6% for the week.

Prices of the yellow metal retreated slightly on Wednesday after Fed Chair Jerome Powell warned that U.S. interest rates were likely to peak at higher-than-expected levels, even as the central bank hiked rates by a relatively smaller 50 basis points (bps) and outlined a slower pace of hikes.

Rising interest rates were the biggest headwind to gold markets this year, as they drove up the opportunity cost of holding non-yielding assets. With Wednesday’s hike, the Fed has raised its benchmark rate by 425 basis points this year, putting it at its highest level since the 2008 financial crisis.

While this did make a dent in inflation, pulling it further away from a 40-year high, it still remains well above the central bank’s annual target of 2%. Powell cited this as the main driver of higher-than-expected interest rates.

The Fed also reiterated that it is willing to dampen U.S. economic growth and the job market in order to bring down inflation.

“While the market may view inflation as being in its death throes, the Fed certainly does not. For the Fed to relax it will want to see substantial evidence that inflation is slowing, not just one or two months where core inflation has come in less than the market was expecting,” analysts at ING wrote in a note.

Other precious metals were also muted, while risk-driven assets such as stocks and currencies retreated.

Among industrial metals, copper prices retreated on Thursday amid continued uncertainty over a Chinese economic reopening. While the country relaxed several anti-COVID measures this month, it is facing a large spike in infections - so much so that the government said it was now impossible to track the virus’ spread.

Copper futures fell 0.3% to $3.8522 a pound. Uncertainty over China, the world’s largest copper importer, is expected to spur more near-term volatility in markets.

Copper was also dented by the prospect of slowing global economic growth, especially as the Fed signaled a potential cooling in the U.S. economy.