Rising Inflation Amid Tapering Scenario, Gold Bugs Remain Calm

As investors centered their attention on the latest U.S Federal Reserve policy decision, the yellow metal fell in London on Wednesday morning.

The U.S. central bank will present its plans for combating rising inflation and calming concerns about the economy’s recovery following COVID-19.

Gold futures traded at $1,781 an ounce, down more than 330 basis points from their last close. The Fed will unveil its tapering timeline later in the day.

If the Fed holds a hawkish meeting, real yields may rise and the DXY may gain the momentum that it needs to break above recent highs in the mid-94.00s, which would not bode well for gold.

Consequently, the precious metal can easily slip below its 21- and 50-days moving average at around $1,780, leading to a retest of recent lows in the $1770s, before moving back to support around $1,750 an ounce.

It is likely that the central bank will begin reducing its monthly asset purchases by $15 billion each month through mid-2022, but the timing of interest rate hikes remains unpredictable, further giving some gold bugs the ability to hold the line.

Thursday will also be the day for the Bank of England to announce its decision. Despite this, the U.K.’s end of its furlough program did not lead to a surge in new job seekers. A rise in unemployment is not likely to bolster the case for an interest rate hike.

Gold has been limited in its downside potential by recent  global inflation concerns, however, and this has spurred buying interest in gold.

In a meeting between BOJ governor Haruhiko Kuroda, economy minister Daishiro Yamagiwa and finance minister Shunichi Suzuki on Tuesday, policymakers reaffirmed the BOJ’s commitment to its 2% inflation target.

Data from China’s Caixin services purchasing managers index, released earlier in the day, showed that it was 53.8 in October. Despite being slightly higher during the month of June and boosted by robust demand, rising inflation remains a concern for the year ahead.

The precious metal can be used as a hedge against inflation, but reduced stimulus and interest rate hikes tend to raise the yield on government bonds, increasing the opportunity cost of holding non-yielding bullion.

At the end of its two-day policy meeting on Wednesday, the U.S central bank is expected to approve plans to scale back its bond-buying program.