Gold Price Slides as Fed Rate Expectations Shift Gold Market Outlook
LONDON (March 3) Gold and April Gold Futures are sharply lower on Tuesday as demand for the U.S. Dollar is outpacing demand for the precious metal. I’ve said numerous times that I consider gold to be more of an investment than a safe-haven asset, and this could be one of those times when it is neither. Clearly, we’re not seeing the safe-haven demand with the war in full-throttle, and it looks as if it’s losing some of its luster as an investment today. We’re not even seeing it used as a hedge against a stock market sell-off.
Margin Calls May Be Forcing the Selling
What we could be experiencing is gold liquidation due to stock market margin calls. As stocks decline, exchanges ask leveraged investors to put up more money to cover their positions. If they need to raise cash, they’ll sell their most profitable positions to get it. Based on this year’s early performance, gold looks like a viable candidate for margin call money.
The Dollar’s Rise Is More Than Just Sentiment
Daily US Dollar Index (DXY)
As far as the dollar is concerned, yes, it is trading at a one-month high and poised to move higher, making gold less attractive to foreign buyers. Today, some analysts are saying it is being supported by “cautious market sentiment.” That sounds like a catch-all phrase to me. However, if you dig deeper, then you’ll have to conclude that inflation fears are more likely the main driver of the dollar’s bullish move.
With soaring crude oil prices raising inflationary risks, dollar traders may be raising their interest rate expectations. And I believe the Fed is in a better place to raise rates if they have to than the other major central banks like the European Central Bank (ECB) and the Bank of England (BOE).
Backing this assessment is the CME Group’s FedWatch tool that is showing the Fed will hold rates in March, and is 60% likely to do the same in June. The odds were previously just below 45%. Gold traders have been pricing in at least two rate cuts in 2026, but if inflation starts to rip higher, that assessment will have to be taken off the board. Today’s weakness may be reflecting that possibility.
Why the Pros Are Trimming Gold Positions
Professionals don’t simply look at charts and technical indicators like small speculators do. They also look at yields to determine where they can get the best return on their investment with minimal risk. So they are likely trimming gold positions in anticipation of a better return from a possible rate hike.
FXEmpire
