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In: Finance

Jerome Powell kicked things off on Monday by not ruling out a 50 basis-point (bp) hike at a Federal Open Market Committee (FOMC) meeting this year, if necessary.

“if we conclude that it is appropriate to move aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,”  said specifically the Fed Chairman.

The market is now pricing in around seven rate hikes of 25 bp in the six meetings left in 2022, implying a 50 bp move at some point.

St. Louis Fed President James Bullard added on Tuesday to his hawkish credentials by saying that “faster is better” when it comes to rate hikes.

These hawkish comments have lifted Treasury yields across the curve.

This environment can manifest itself in two ways for a lower gold price. The higher and rising nominal rate of return on fixed interest assets presents itself as better alternative to a non-yielding asset such as gold.

Secondly, if the Fed is perceived to be genuine about fighting inflation, then market priced inflation may come down. This increases the real return on debt investments. The real return being the nominal rate less the inflation rate over the same tenure.

Following that peak in gold, the 10-year breakeven rate remained relatively steady, but nominal yields picked up, lifting real yields and gold fell at the same time.

If the Fed continues to recognize that they need to raise rates aggressively, this could undermine gold further.

The outlier to this perspective is the unknown consequences of the Russian invasion of Ukraine and a closer look at the price action is warranted.

The all-time high for gold was achieved in July 2020 at 2,075.14. Earlier this month the price rallied toward it but failed and made a peak of 2,070.42 creating a double top. This failure to break higher could be a bearish signal.

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