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Gold investors profit-take ahead of FOMC

March 21, 2023

LONDON (March 21) Gold prices witnessed limited movement in early Asian trade on Tuesday after hitting significant highs in the prior session.

Traders locked in some profits in anticipation of the Federal Reserve’s interest rate decision, while concerns over a potential banking crisis kept safe-haven demand strong.

The yellow metal rose sharply over the past week amid growing fears of a banking collapse in Europe and the US. This led to significant inflows into traditional safe-haven assets, including gold, while bets that the Federal Reserve lacks the economic headroom to keep raising rates weighed down on the US dollar.

On Monday, gold prices briefly crossed the $2,000 an ounce level for the first time in a year, but caution kicked in ahead of a pivotal Federal Reserve meeting expected to take place on Wednesday.

As of 10:40 GMT, spot gold was down slightly at $1,964.30 an ounce, while gold futures remained flat at $1,983.70 an ounce.

All eyes are on the Federal Reserve this week as the bank is expected to increase interest rates by 25 basis points (bps) in its two-day meeting. This is a smaller figure than the previously expected 50 bps hike.

However, due to a brewing bank crisis, markets have reassessed their expectations on whether the central bank will tighten policy further. A sharp rise in interest rates could apply considerable pressure on the banking system. As a result, a minority of traders are anticipating that the Fed will hold rates on Wednesday.

If the Federal Reserve adopts a less hawkish approach, gold and other precious metals are likely to benefit as rising interest rates push up the opportunity cost of holding non-yielding assets. In addition, uncertainty surrounding the Fed over the past week has weighed down on the US dollar, further boosting metal prices. The Fed also rolled out emergency liquidity measures for the banking sector, undermining some of its monetary tightening over the past year.

However, given that US inflation is still trending above the Federal Reserve’s target range, the bank may choose to raise interest rates further.


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