Since Monday, gold has fallen by 2.4%, logging the worst weekly result since the end of November. Prices collapsed from previous peaks on expectations that the Fed may raise the interest rate more sharply than previously planned this month.
On Wednesday, the central bank hiked the benchmark rate by only 25 basis points instead of 50 basis points.
At the same time, the Fed revised its GDP estimate for 2022. It downgraded the economic outlook due to geopolitical tensions and soaring inflation.
In order to curb inflation, the regulator intends to raise the interest rate 6 times this year. Before the start of the military conflict in Ukraine, the Fed had planned to hike the key rate 3 times.
The less hawkish stance taken by the central bank is bullish for gold. Yesterday, the quotes resumed an upward movement after a 5-day decline.
It closed on the New York Stock Exchange COMEX with an increase of 1.8% or $ 34. It was able to approach $1,943.20.
Gold also spared wings amid the weakness of the US dollar. The latter unexpectedly dropped following the FOMC meeting's results. On Thursday, the US dollar index fell by 0.8% against its main rivals.
Analysts believe that the beginning of the Fed policy tightening cycle may trigger a rally in gold prices in the next few months as it was in 2015-2016.
In December 2015, the Fed announced an increase in the interest rate. The following day, gold started a dazzling rally that lasted for six months, analysts Brian Lundin pointed out.
A similar scenario may occur now. However, unlike 6 years ago, economists should take into account not only the macroeconomic but also the geopolitical factors.
Gold prices will also depend in the short term on news about the military conflict in Ukraine.
The Russian special military operation in Ukraine has been going on for 4 weeks. Since its launch gold has jumped above $2,000 almost to pandemic highs.
However, now, there are small signs of de-escalation of the conflict. Therefore, gold sharply declined.
Top negotiators reportedly discussed a draft 15-point peace plan. Gold prices nosedived following this news, analyst Michael McCarthy said.
Although both parties have agreed to return to negotiating table, they are unable to reach a compromise. Risk appetite recovered amid hopes for a truce. Gold as a safe-haven asset lost momentum.
This morning, the quotes declined again. At the time of writing this article, gold lost 0.3% compared to yesterday's close, trading at $1,937.30.
The further trajectory of gold will depend on the news about the Russia-Ukraine conflict as well as investors' assessment of the first rate hike.