Gold slumps as Fed confirms its resolute stance on lowering inflation

In the span of just under two weeks, from Thursday, May 4 to Wednesday, May 17 we have seen gold drop substantially and concurrently the dollar gained substantially.

Gold traded to a high of $2085 on March 4 and today traded to a low of $1978 resulting in a drop of $107 in just under two weeks. This is a net decline of 5.26% per ounce. When we look at the dollar index it traded to a low of 100.53 on Thursday, March 4 and today traded to a high of 102.96. This means that the U.S. dollar when compared to a basket of eight other international currencies gained roughly 2.42% for the same period.

Comparing the percentage decline of gold to the percentage advance of the dollar index it is clear that dollar strength has been a major component to the fall in gold pricing. However, the decline in gold is not isolated to just dollar strength, additional selling pressure by market participants was also a major contributor.

It seems that the root cause of dollar strength as well as the substantial percentage decline in gold can be directly attributed to recent comments coming from Federal Reserve officials. In essence, Fed comments have reinforced the resolve and commitment to keep interest rates elevated and this is illustrated in the December 2022 “dot plot” showing that they would keep their benchmark interest rate (Fed fund rate) elevated throughout 2023. More importantly, they have expressed that a rate cut this year remains highly unlikely.

The Federal Reserve continues to use its primary tool to reduce inflation which is to raise interest rates which cause an economic contraction. An economic contraction works to lower the price of goods and services. Simply put the Federal Reserve works with the principle of supply and demand economics. Higher prices for goods and services will reduce demand.

Recent comments by the Federal Reserve have confirmed their commitment. According to MarketWatch, Underscoring the Fed’s resolve to curb inflation, Chicago Fed President Austan Goolsbee had said on Tuesday it was “far too premature to be talking about rate cuts,” while Cleveland Fed President Loretta Mester said, “rates were not yet at a point where it could hold steady.”

 As of 5:55 PM EDT Gold futures basis the most active June contract is currently fixed at $1985.70 after factoring in today’s decline of $7.30 Or 0.37%. The U.S. dollar is currently trading at 102.73.

Wishing you as always good trading,