OPINION
Market Rating Before FOMC MeetingJan 31
Ounce Gold Returns All 2.5 Year Earnings
Ounce gold, which historically took the lead in safe harbor purchases, closed in February 2020 at the $1585 level a few days before the new type of coronavirus (Covid-19) pandemic was declared. Subsequently, with the safe harbor purchases triggered by the World Health Organization (WHO) declaring a global epidemic, that is, a pandemic, ounce gold reached an all-time high in August 2020 at 2075 dollars.
Although the discovery of a vaccine against Covid-19 and the globally spreading vaccination campaign suppressed the ounce by recovering the international risk appetite, the ultra-loose monetary policies of the developed country central banks under the leadership of the US Federal Reserve (FED) in this period kept the demand for yellow metal resistant and an approximately 2-year horizontal view was observed in the 1720-1880 line.
As Russia's invasion of Ukraine at the end of February 2022 and the subsequent harsh sanctions from the West adversely affected the global risk atmosphere, ounce gold again approached its peak level on March 6: 2070 dollars. However, it could not provide permanence.
As of March 9, the yellow metal started a dramatic downward path. In particular, the FED entered an aggressive monetary tightening cycle to combat the inflation caused by the pandemic's damage to global supply chains, high commodity prices due to the war, and strong domestic demand.
The FED's interest rate hikes continued with 50, 75, and 75 basis points in May, June, and July meetings, respectively. By the September meeting, the FED pulled the federal fund target to the 3-3.25 percent range with its third 75 basis point increase. With the reflections of this, against the dollar index, which reached its highest level since June 2002, ounce gold could not resist and officially returned its gains since April 6, 2020, by retreating to the level of $1621 yesterday.
At the same meeting, the Economic Projections Report, which is based on the expectations of the Federal Open Market Committee (FOMC), is of critical importance for the future of ounce gold pricing. In the report, the Committee's median interest rate expectation was 4.4 for 2022 and 4.6 for 2023. That means further tightenings by 75 and 50 basis points in the remaining two meetings of the year and another 25 basis points in 2023.
At this point, it seems very difficult for treasury yields and precious metals to find demand against the dollar that is leading safe-harbor purchases with interest rate expectations. Indeed, the US benchmark 10-year bond yield rates have reached their highest level since April 2010 at %3.91. With the wave of sales in the bond market, the 2-years also reached the peak seen since August 2007 with % a 4.33. The 2-10-year yield curve is in the minus 0.42 region.
Unless the FED downshifts in monetary tightening, it is a tangible possibility that ounce gold will remain under strong pressure. In other words, the aggressive tightening expectation of 75 basis points from the FED in November is the most important signal that the yellow metal will continue to be under the weight of the dollar soon.
By the end of the year, it seems that the FED will decelerate in policy tightening and will expect a return to the %2 inflation path until approximately 2024, with the estimated funding range of 4.50 - 4.75 after the second meeting of the next year. This process is extremely important in terms of reducing the risks of the decline in ounce gold. However, as long as the FED gives interest on the dollar above neutral, it is unlikely that ounce gold will turn to a new buying path.
Technically speaking, it is observed that the commodity has entered an intermediate downward trend. As long as the 1735 level, which is indicated by the 50-period exponential moving average (EMA) being one of the important determinants of the medium-term pricing direction of ounce gold, is not exceeded permanently, the selling pressure that will be in effect may continue to force the commodity down until the psychological boundary line of 1500 is seen behind 1570.
