Monetary Policy Shift Still Haunting Gold

The Fed’s aggressive policy shift from the beginning of 2022 until now, which has been followed by almost all global Central Banks, has brought significant changes to the financial markets. If you remember back in January when the Fed injected $60bn/month into the market through QE, the Fed funds rate was between 0% – 0.25% with the 2-year T-Note yield below 1% and the 10-year T-Note yield around 1.9%. Back then, they only expected one or two 0.25% rate hikes during 2022.

But now, all of those forecasts are beyond what they wanted. Yesterday, St Louis Fed President Bullard said that the Fed expects to tighten policy further in the coming months, and the market has understood that. He added, “if you look at the Fed’s dot plot, it looks like the FOMC expects quite a lot of additional movement this year. I think that’s digested by the market and seems to be the right interpretation.” Meanwhile, his colleague from Cleveland, Mester, said it appears that US labour demand is still outstripping supply and interest rates are still not in restrictive territory. She added that “real interest rates, judged by inflation expectations next year, should be in positive territory and stay there for a while.”

The Fed is moving $95bn per month (QT), and Fed funds are on pace to reach 4% by the end of the year, as the next 75bp hike is forecast from the current 3.25%. The 2-year T-Note yield is on pace for 4.21% and the 10-year at 3.75%.  This is a change of pace from previous expectations, and it seems the Fed may have doused too much fuel into the market and is now becoming too busy to put out the inflationary fire.

Indeed the conditions this year have been unusual; apart from the pandemic which has put a strain on supply chains, the geo-political map of the world has fuelled various sentiments very quickly. The market is moving at a very unnatural pace, far from the ideal trend that everyone wants. The high cost of living has spawned extreme political and monetary decisions. Fear over global recession, aggressive CB policies, energy crisis, amd more are still adding to the list of negatives in the 2022.

Global stock prices reacted with great sensitivity, bringing markets under bear control since the beginning of the year. Commodity prices did likewise as the Fed’s policies have put the Dollar into the hedge asset of choice. Interest rate-sensitive gold fell to fresh lows. If investors’ appetite for cheaply priced bond auctions continues, it could trigger a drop in yields (as it looks like the current government needs more funds to prop up the economy in times of high cost of living). A decline in bond yields, then, could trigger a series of rises in commodity prices, especially gold. However, if the Fed is still on a hiking path, then gold prices are likely to be muted until the end of the year.

Technical Analysis

Gold this week is still recording a lead of over 1% against the US Dollar, after a rebound of 1,614.69 (FE 100%/50% FR) brought gold spot prices back near the yearly low of 1,676.77 broken on 15 September. The price is now entering a balanced area on the daily chart. The balanced area indicates the highest auction region where most of the trading activity takes place. It looks like the market wants calmer conditions at the end of the month, after the wild volatility throughout September. However, there are risks today given the release of the Core PCE Price Index on a monthly basis.


From a technical point of view, the Gold price is still on a downward path as evidenced by the dynamic movement in a downward trajectory. A move below 1,614.69 would confirm a continued retracement to the 61.8 %FR level around 1,512.00. Meanwhile, a move above 1,680.79 resistance would confirm a continued rebound, but likely be limited to 1,735.00 resistance as well. Indications from both oscillators and EMA tools still point to the downside for gold in the short term.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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