(Kitco Commentary) – Gold traded lower Tuesday, moving closer to its current support and double-bottom level near $4,000. Gold futures fell $50, or 1.22%, to $4,029 as of 4:55 p.m. ET.
Since the start of March, gold has been reacting to increasing inflationary pressures driven by rising crude oil prices. Elevated oil prices have led traders to anticipate at least one interest rate hike by September, reversing earlier expectations for rate cuts this year.
The spike in oil prices has been compounded by Chairman Kevin Warsh’s somewhat hawkish tone at his first FOMC meeting as Fed chair, and traders remain split on the central bank’s decision due Wednesday. Roughly two-thirds of the market expects rates to remain unchanged at 3.50% to 3.75%, while about one-third of futures traders expect a 25-basis-point hike, which would raise the federal funds rate to 3.75% to 4.00%.
These expectations for higher interest rates have helped lift the U.S. dollar index to its highest level in 14 months, putting direct pressure on gold prices. The combination of higher oil prices and a stronger dollar has kept gold trading within a bearish descending triangle for the past five months. During that period, the U.S. dollar index has risen by approximately 3.8%.
Despite both crude oil and the U.S. dollar index declining Tuesday, gold continued to move lower, most likely as traders priced in the possibility of a rate hike at the conclusion of Wednesday’s FOMC meeting.
Gold has been unable to break out of this descending triangle pattern since the inflation narrative sparked by the war in Iran began on Feb. 28. Since the start of the conflict, gold has lost roughly 22%, an unusual reaction for a metal that has traditionally benefited from geopolitical uncertainty. Instead, gold has been driven primarily by expectations for higher interest rates, rising real yields, and a stronger U.S. dollar. That dynamic is unlikely to change until interest rates begin to decline or markets start pricing in lower rates.
Wednesday’s rate decision could prove pivotal for the precious metal, which is now trading near the apex of its descending triangle pattern. A federal funds rate increase would likely trigger a break below critical support around $3,900. Even if rates remain unchanged, support could still come under pressure if the Fed’s guidance is perceived as hawkish. Conversely, a more dovish tone could propel gold above its descending resistance line for the first time in five months. Either way, gold is approaching the apex of a pattern defined by lower highs and a double bottom, setting the stage for a potentially significant breakout following the Fed’s decision.
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