Gold extends losses ahead of Federal Reserve meeting

Gold prices fell in European trading on Tuesday, extending losses for a second consecutive day and approaching a break below their six-week low, pressured by a stronger US dollar and another surge in the yield on the 10-year US Treasury note to its highest level in 19 years.

The Federal Reserve begins its monetary policy meeting later today, with markets pricing in a 92% probability of a 25-basis-point increase in US interest rates, which would mark the first rise in borrowing costs in the United States since July 2023, as policymakers seek to counter mounting inflationary pressures.

The Price

• Gold prices fell 0.9% to $4,261.42, from an opening price of $4,299.15, while recording a high of $4,317.48.

• At Monday’s settlement, gold prices lost 1.15%, marking their second decline in three days, and hit a six-week low of $4,253.73 an ounce amid expectations for higher US interest rates.

US dollar

The US Dollar Index rose 0.2% on Tuesday, extending gains for a second consecutive session and approaching a break above its two-week high, reflecting continued strength in the US currency against a basket of global currencies.

As we know, a stronger US currency makes dollar-denominated gold less attractive to buyers holding other currencies.

The dollar’s advance comes amid demand for the US currency as a preferred alternative investment as geopolitical tensions in the Middle East escalate, as well as its appeal amid a broad rise in US Treasury yields.

US Treasury yields

The yield on the 10-year US Treasury note rose 0.9% today, extending gains for a seventh consecutive session and hitting a 19-year high of 5.041%, providing further support for the US dollar.

Global oil prices

Oil prices rose more than 3% on Tuesday, moving close to surpassing their four-month highs after a fresh Houthi attack targeted oil facilities in Saudi Arabia, renewing concerns over the security of global oil supplies.

Federal Reserve

The Federal Reserve begins its monetary policy meeting later today, with its decision due on Wednesday. Expectations strongly favor a 25-basis-point interest rate hike, which would be the first increase in US interest rates since July 2023, while investors will also look for further clues on the evolution of inflation and the path of interest rates in the coming period.

US interest rates

• Amid rising oil prices this week and according to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at this week’s meeting fell from 14% to 8%, while the probability of a 25-basis-point rate hike rose from 86% to 92%.

• The probability of the Federal Reserve leaving interest rates unchanged at its December meeting fell from 2% to 1%, while the probability of a 25-basis-point rate hike rose from 98% to 99%.

• The Federal Reserve’s quarterly Summary of Economic Projections, due on Wednesday, is expected to provide further clues about the future path of US interest rates.

Gold outlook

Tony Sycamore, a market analyst at IG, said the way Federal Reserve Chair Kevin Warsh frames the rate hike will be more important for gold than the increase itself. If he presents it as the beginning of a monetary tightening cycle that will be assessed meeting by meeting, it would be a blow to gold and risk assets more broadly.

Sycamore added that if Warsh instead signals a preference for a more measured pace, it would provide some support to risk sentiment and gold.

SPDR Fund

Gold holdings at the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, were little changed on Monday, leaving the total at 1,047.43 metric tons, the lowest level since September 1.