FX.co ★ Gold falls sharply on Powell's speech

Yesterday, the gold market went through a roller coaster ride. In the course of trading, the asset showed impressive growth but then everything changed in a snap. The speech by the US Fed Chair dealt a crushing blow to the precious metal.

One of the main factors to shape the price of gold is the new coronavirus strain discovered in South Africa last week. On Tuesday, Moderna's CEO Stephane Bancel questioned the effectiveness of existing vaccines against Omicron.

He also suggested that it would take months to develop and mass produce a vaccine that specifically targets the Omicron variant which has not been studied well.

Stephane Bancel's comment sparked panic in the US stock market, which had recovered from the shock a day earlier. On Monday, stock indices closed with gains but fell sharply on Tuesday.

Following the alarming words of Moderna's chief, the US Treasury yields dropped sharply to 1.480%.

Amid a massive escape from risk assets and falling bond yields, gold was able to break through the key mark of $1,800 and climb to an intraday high of $1,811.40 per ounce.

Besides, the asset was supported by weak economic data in the US. In November, the Chicago Business Activity Index, which is considered the main business barometer of the region, declined to its lowest value since February 2021 and amounted to 61.8 against 68.4 in the previous month.

Consumer confidence in the US also weakened. The indicator dropped from 111.6 in October to 109.5 in November. This is the fourth decline in the last 5 months.

Despite a number of positive factors for gold, its triumph did not last long on Tuesday. The precious metal immediately dropped after the chairman of the US Federal Reserve testified before the Senate. Amid a clear hawkish tone of Powell's speech, gold quotes plummeted from the daily high by almost $35.

Jerome Powell said it would be appropriate for the central bank to consider speeding up the tapering of its asset purchases during the next meeting in order to complete the process a few months ahead of June.

He highlighted a steady pace of the US economic recovery and, in particular, the upbeat labor market statistics and strong spending data.

However, the Fed chairman made the main emphasis on the growing inflationary pressure. Jerome Powell said that inflation might not be temporary, adding that the risk of a persistent rise in prices is becoming higher.

Jerome Powell's announcement about a possible acceleration of monetary policy tightening triggered a rapid drop in gold prices. On Tuesday, February futures fell by 0.5%, or $8.70, closing the session at $1,776.5 an ounce.

November was not a good month for gold. Over the month, the asset dipped by 0.4%. Last week was the worst one as gold lost 3.6% of its value. The reappointment of Jerome Powell as head of the Fed was the main factor to weigh on gold.

Yesterday, the chairman of the central bank confirmed investors' fears about the Fed's hawkish stance, making the regulator's agenda for the next meeting rather straightforward. The Fed is expected to discuss its monetary policy in December 14-15.

Some experts believe that yesterday's statement by Jerome Powell predetermined the direction of gold for the months to come. Yet, other specialists hold a more optimistic view.

"The primary drivers for gold will be the simple fact that the Fed can't get very far down the path toward policy normalization without either collapsing financial markets or running into the brick wall of debt service costs. Once investors realize this, gold will take off," analyst Brian Lundin said.