Price of Gold Fundamental Daily Forecast – Bearish if Fed Agrees with Market Expectations of Three Rate Hikes

Gold is trading lower on Wednesday shortly before the Federal Reserve is scheduled to release its latest monetary policy statement that could determine the direction of prices for months. Ahead of the Fed, investors are awaiting cues on the central bank’s plan to taper its massive stimulus, its outlook for inflation and a possible timetable for its first post-pandemic rate hike.

At 13:01 GMT, December Comex gold futures are trading $1776.80, down $12.60 or -0.70%.

Today’s early price action strongly suggests that gold investors may be finally realizing that tapering is here and rate hikes are coming after weeks of propping up the market on the hopes of runaway inflation.

Nonetheless, there are still risks in being too bearish for gold over both the short-term and long-term. The Fed may not tell us how aggressive it will be in reducing its monthly bond purchases. Central bankers may not have decided when to raise rates or how many times to do that next year.

Gold traders still face heightened volatility because the market is telling them one thing and the Fed may have other ideas.

What is the Market Saying?

The Federal Reserve on Wednesday is expected to approve plans to scale back its $120 billion monthly bond-buying program put in place to help the economy during the coronavirus pandemic, while investors will also be focused on commentary about interest rates and how sustained the recent surge in inflation is.

Investors continue to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in Federal Funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s FedWatch.

Goldman Sachs has brought forward its forecast by a year to July 2022 for the first post-pandemic U.S. interest rate hike, as the investment bank expects inflation to remain elevated.

“The main reason for the change in our liftoff call is that we now expect core PCE inflation to remain above 3% – and core CPI inflation above 4% – when the taper concludes,” Goldman’s chief economist, Jan Hatzius, wrote in a client note.

Goldman Sachs also expects a second interest rate hike in November 2022 and two rate increases each year after that.

What Will the Fed Say?

I think the Fed will announce tapering, but will take a wait and see approach toward the timing of its first rate hike and subsequent hikes. In doing so, policymakers will attempt to avoid shocking the market by suddenly changing their tune on inflation from “transitory” to a major problem that needs to be fixed by aggressively raising interest rates multiple time within a year.

Furthermore, I don’t think the Fed wants to stifle a zig-zagging economic recovery or risk slowing down the labor market trend.

Gold Forecast

If the markets have it right and the Fed takes an extremely hawkish approach to fighting inflation then gold prices could plunge toward the $1738.60 to $1716.00 area. If the Fed is less-hawkish than expected, then gold could find support between $1757.40 and $1738.60. If the Fed is perceived as dovish then $1795.00 to $1800.00 will become the primary upside targets.