Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Markets were surprised at the scale of the adjustment to the Fed policy forecasts and treasury yields backed up steeply, spooking risk sentiment and taking equities lower, gold sharply lower and sending the USD spiking sharply to the upside.
The headline in today’s podcast says it all: “Time to smell the coffee: The Fed tightening cycle has begun” Although the dot plot is not signaling any rate hikes before 2023, the fact the Fed suddenly signaled willingness to consider tightening was something the non-yielding investment metals struggled to deal with and as a result gold, already on the defensive after getting rejected above $1900, broke down through several key technical support levels.
Gold remains the most interest rate and dollar sensitive commodity, and while the dollar reached a two-month high, it was the movements in Treasury yields that spooked the market. While acknowledging inflation is rising the Fed only lifted their 2022 and 2023 projections by 0.1% to 2.1% and 2.2% respectively. The firm belief inflation will be transitory helped drive a 10 basis point reduction in 10-year breakeven yields. With nominal yields at the same time rising by 10 basis points, most of the damage was seen in real yields which jumped 20 basis points to -0.75%.