Gold Bulls Hope Powell Softens Tone on Aggressive Tightening

Gold futures are edging lower early Wednesday as speculative buyers continue to remain cautious about chasing the market higher just a couple of weeks before the U.S. Federal Reserve could announce as much as a 50-basis point rate hike.

Despite the tentativeness at a long-term technical resistance zone, the market remains supported by those traditional buyers who believe in gold’s value as a safe-haven asset.

Basically, we could be looking at a stand-off between the speculators who believe gold is the right place to park money during a geopolitical crisis, and those who believe there are other places to earn a return on their money during a period of heightened volatility.

At 05:10 GMT, April Comex gold is trading $1937.60, down $6.20 or -0.32%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $181.65, up $3.27 or +1.83%.

Early Monday, gold is facing some headwinds due to slightly higher U.S. Treasury yields, a firmer U.S. Dollar and a small rise in U.S. stock market futures. The USD/JPY is also edging higher, which suggests risk sentiment is steady-to-better.

Powell’s Congressional Testimony Could Give Gold Traders Some Insight

Fed Chairman Jerome Powell is scheduled to testify before Congress on Wednesday and Thursday, and his first comments on the economy in nearly five weeks will confront a situation that has become markedly more complex since January, when he outlined a straight-forward central bank effort to address high U.S. inflation, Reuters wrote.

Essentially, the Fed’s plan to end the loose money policies used to fight the coronavirus pandemic is facing an unexpectedly early test as the Russian invasion of Ukraine poses new economic and financial risks already being felt in global markets.

On February 10, traders priced in an 80% chance of a 50-basis point rate hike by the Fed when it meets March 15-16. As of Tuesday’s close, the chances were less-than-10%.

Gold prices have rallied over $150 per ounce since February 11. Although some of the rally has been fueled by Russia’s invasion of Ukraine and the harsh sanction imposed on the rogue nation, some traders bought gold because of expectations of higher inflation, while others may have bought the precious metal because they believe the Fed may even pass on a 25-basis point hike. This could happen if Russian President Putin decides to bring the war to the United States.

Short-Term Outlook

Powell could move the gold market sharply higher on Wednesday if he says the Fed could discuss passing on a rate hike at its policy meeting. The Fed like other major central banks could face less political pressure to contain inflation as long as the conflict between Russia and the West continues.

Given the quick turn of events over the past week, Powell may suggest the Fed may have to move more cautiously. This statement alone could be the catalyst that bullish gold traders have been waiting for.

However, gold prices could retreat if Powell says a 50-basis point rate hike is not off the table. While a firm decision on at least 25-basis points could keep a lid on prices, at least temporarily.

As a side note, gold is trading higher than it was before the Russian invasion of Ukraine, but so is the U.S. benchmark S&P 500 Index. So what does this tell us? That investors are buying gold for its safe-haven qualities, or that perhaps the Fed won’t be as aggressive with a rate hike?

After all, U.S. equities would also benefit if the Fed pulled back the reins on an aggressive rate hike. But let’s see what Powell has to say before we speculate further.