Fed Briefly Send Gold to the Downside

Gold prices are down 1.4% this week, trading at $2,615 per troy ounce, recovering from a steep 2.4% decline on Wednesday that brought prices to $2,582, their lowest level since November 18. The market is at a critical juncture, with the potential for further declines to $2,300-$2,500 or a renewed rally towards $3,100-$3,200. This delicate balance follows the Federal Reserve's hawkish stance, which has put downward pressure on the yellow metal.

The Fed implemented a quarter-point interest rate cut to 4.50% but maintained a strongly hawkish outlook. Policymakers raised inflation forecasts, lowered unemployment projections, and increased GDP expectations for 2024. The Fed’s dot plot now indicates only two potential rate cuts next year, compared to the four projected in September. Fed Chair Jerome Powell stressed caution in cutting rates, emphasizing the need for clear signs of inflation dropping below 2.0% year-over-year. He also revealed that some FOMC members debated raising rates further, particularly if new tariffs on China are introduced. This stance pushed U.S. 10-year Treasury yields up to 4.53% from 4.39%, strengthened the U.S. dollar by 1.3%, and led to a 3.2% drop in the S&P 500 to 5,860 points, marking the worst market reaction to Fed policy since March 2020.

The hawkish Fed tone sparked a sharp sell-off on Wednesday, but Thursday’s rebound appeared more like a recovery to fair value than a reversal. Investors now await key U.S. economic data, including Q3 GDP and the PCE index, which could influence market expectations. A weaker-than-expected outcome would increase the likelihood of a Fed rate cut in January, currently priced at just 8.6%.

Adding to the uncertainty is the looming risk of a U.S. government shutdown. President-elect Donald Trump rejected a proposed funding plan, and without a resolution by December 20, the government could run out of funds. Such a scenario would likely boost gold prices as investors seek safe-haven assets.

From a technical perspective, gold remains precariously positioned. A diamond pattern on the charts suggests a potential rally to $3,100-$3,200 if resistance is breached. Key support lies at $2,550, the level of the Fed’s first rate cut. Historically, gold has rebounded from this level during recent easing cycles. However, a sustained break below $2,536 could lead to a decline toward $2,300-$2,500.

Investor activity is sending mixed signals. The SPDR Gold Trust (GLD) reported minor net inflows of $24.5 million this week, following outflows of $1.23 billion over the previous two weeks. While not a strong signal, continued buying by large investors could indicate upside potential.