Gold price retreats after Fed announces rate hike

Gold price was steady early on Wednesday, testing its $1916.84 level resistance, as markets awaited the results of the Fed meeting. Diplomatic talks between Russia and Ukraine were resumed this week, sparking hopes of a de-escalation of the conflict, putting pressure on the price of gold. Negotiations continued through Wednesday and have entered a more serious phase, as both sides seem to feel there is room for compromise and for finding a middle ground.

Later on Wednesday, the Federal Reserve raised its benchmark interest rate by 25 base points, bringing its benchmark interest rate to 0.50%. In the ensuing press conference, Federal Reserve Chairman Jerome Powell signaled that the Fed’s interest rates could reach nearly 2% by the end of the year. Gold prices started declining after the Fed’s announcement, as increased interest rates boost the value of real yields, putting pressure on the price of gold. Later, however, the gold price started climbing a little, going above $1,920 per ounce, as the Fed’s rate hike had been largely priced in by markets. If the price of gold continues to decrease, support may be found near 1,877 per ounce, while resistance may be found around $2,000 per ounce

Treasury yields rose across the US treasury chest this week, in expectations that the Fed would tighten its monetary policy in its meeting on Wednesday. The 10-year US Treasury yield especially rose above 2.2% on Wednesday, its highest level since 2019. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.

During the past few weeks, the gold price has climbed up to $2,050 per ounce, its highest level since the peak of the pandemic, in August 2020. The war in Ukraine has triggered a risk-aversion sentiment, driving investors towards safe-haven assets. Sanctions against Russia have been driving commodities up, especially energy-related commodities, contributing towards rising inflation. The price of gold benefits from rising inflation, since it is often used as an inflation hedge. 

The effect of rising inflation on gold seems to be temporary though, as soaring inflation rates are pushing major Central Banks towards a more hawkish policy with the Federal Reserve raising its interest rate on Wednesday, and the Bank of England expected to follow suit on Thursday.

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Written by:
Myrsini Giannouli

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