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Metals Stocks: Gold retreats from a 2-month high, holds its ground after Fed decision

Gold futures settled at their lowest in over a week on Wednesday, pulling back from a two-month high a day earlier. Prices then showed little reaction in electronic trading after the U.S. Federal Reserve said it would soon be appropriate to raise interest rates.

As expected, the Fed “sent even stronger signals that it will start raising rates in March,” when it will also end its asset purchase program, said said Matthew Sherwood, global economist at the Economist Intelligence Unit.

“The news is supportive for gold in the short term — as seen by the initial market reaction — as investors had feared that the Fed might end quantitative immediately or even push ahead with rate hikes given current inflation trends,” he told MarketWatch.  

After gold futures settled for the session, the central bank’s policy-setting Federal Open Market Committee said that “with inflation well above 2% and a strong labor market, the FOMC expects it will soon be appropriate to raise the target range for the federal funds rate.”

February gold GCG22, -1.82% GC00, -1.82% traded at $1,829.70 an ounce in electronic trading shortly after the announcement. The contract had fallen by $22.80, or 1.2%, to settle at $1,829.70 an ounce, the lowest finish since Jan. 18. The moves follow a 0.6% rise for the precious metal in the previous session, which saw the highest settlement for a most-active contract since Nov. 18, FactSet data showed.

Worries about the damaging effects rising interest rates could have on nonyielding bullion buying have been seen as a one of the main bearish near-term drivers for gold, keeping prices in check.

Theoretically, gold should also benefit from rising inflation concerns because it is viewed as a hedge against pricing pressures, but the prospect of rising rates can be a negative for precious metals which don’t offer a coupon.

But this week, gold has drawn safe-haven bids amid wild swings in values for stocks and geopolitical tensions in Europe, where there are fears about a potential Russian invasion of Ukraine.

Read: How a Russian invasion of Ukraine could trigger market shock waves

Ahead of the Fed announcement, Chintan Karnani, director of research at Insignia Consultants, said he believed Ukraine tensions “will prevent any massive sell-off in gold and silver price” and that overall, both gold and silver would “rise or remain firm after the FOMC meeting due to heightened Ukraine tensions.”

The EIU’s Sherwood said he expects market concerns about the impact of the omicron variant, as well as the Ukraine-Russia crisis will keep gold prices high at around current levels, “until the Fed embarks on its rate-hike cycle.”

He says EIU forecasts a “fairly significant fall in gold prices in the second half of the year as the impact of the coronavirus fades and U.S. interest rates continue to rise,” with the full-year 2022 average seen at $1,761.

“Given geopolitical concerns and that there is a great deal of uncertainty about how and when future coronavirus variants will emerge, there are significant risks to the outlook, with gold prices set to remain volatile,” said Sherwood.

““Given geopolitical concerns and that there is a great deal of uncertainty about how and when future coronavirus variants will emerge, there are significant risks to the outlook, with gold prices set to remain volatile.””

— Matthew Sherwood, EIU

Meanwhile, March silver SIH22, -1.22% lost 0.4% to $23.807 an ounce, following a 0.4% rise on Tuesday, but March copper HGH22, +0.22% tacked on 1.5% to $4.515 a pound. April platinum PLJ22, +1.14% rose 2% to $1,045.90 an ounce.

Palladium futures, however, saw the biggest gains, with March palladium PAH22, +7.11% settling at $2,350.60 an ounce, up 7.4%.

Prices for the most-active contract settled at their highest since September, FactSet data show amid rising tensions over Ukraine, since Russia is the biggest producer of the metal.

The vast majority of palladium is mined in both Russia and South Africa, said Chris Blasi, president of Neptune Global. South Africa’s infrastructure, including power supplies, is deteriorating rapidly, leading to a negative impact on the mining industry and its output, he said.

Along with the breakdown in South Africa, the “geopolitical drama with Russia is causing real concern as to the future supply of palladium,” said Blasi.

“An all-out conflict with Russia would exasperate an already critical supply issue in the palladium space,” and would likely drive palladium “well north of $4,000 per ounce,” he said.

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