Headwinds for gold ahead of FOMC Headwinds for gold ahead of FOMC Headwinds for gold ahead of FOMC

Headwinds for gold ahead of FOMC

Ole Hansen

Head of Commodity Strategy

Summary:  Gold trades near 11-week low ahead of today’s FOMC which is expected to yield an accelerated pace of rate hikes with the market pricing in the first 50 basis-point rate hike in over twenty years. Continued dollar strength and real yields returning to positive territory being the main drivers behind the recent weakness. We look at absolute versus relative returns, and why investors are unlikely to give up on gold at this time.

Gold trades near a ten-week low ahead of today’s FOMC which is expected to yield an accelerated pace of rate hikes with the market pricing in the first 50 basis-point rate hike in over twenty years, and at least the following two meetings are expected to deliver additional half-percent rate moves. Apart from the recent correlation to lower oil, now trading higher as the EU have announced a ban on Russian oil and fuel imports, other headwinds have been created by the surging dollar, up more than 6% against a broad basket of currencies since the start of the year, and a continued rise in US bond yields. These developments have all helped send the price lower, in part driven by short-term technical selling by hedge funds and CTA’s.

From an absolute performance perspective a 1.5% year-to-date return in dollars at a time of surging inflation seems less than impressive. However when adding the tumble seen across stocks and bonds, an investor having diversified part of his portfolio to gold has little to complain about. Even less so for a non-dollar based investor who have seen a sharp divergence between gold and the mentioned asset classes.

The table below shows how a dollar-based investor has achieved a 14.2% outperformance relative to the S&P 500 and 22.2% versus an ETF tracking long duration US bonds. Across the big pond in Europe, an investor would have seen a 22.2% outperformance against the Euro Stoxx50, a pan-European stock index, and 19.3% against an ETF tracking European government bonds. 

The latest weakness which gathered some momentum following Friday’s failed attempt to break above $1920/oz has been driven by a renewed rise in US ten-year real yield into positive territory for the first time since early 2020. Comparing gold and real yields at the current level around +0.12% you could argue that gold is theoretically overvalued by close to 200 dollars.

Source: Saxo Group

However, as we have seen in recent months, demand for gold, especially through ETF’s have remained robust during the period of rising real yields. Primarily due to re-allocations by asset managers looking for a hedge against a policy mistake, i.e., the FOMC hikes until the economy breaks, elevated volatility in stocks and bonds and a prolonged period of elevated inflation sapping the outlook for several sectors of the stock market.

In fact, the predicament of the current market situation was highlighted by Paul Tudor Jones in an interview with CNBC yesterday. He said that the environment for investors is worse than ever as the Federal Reserve is raising interest rates when financial conditions have already become increasingly tight. “Clearly you don’t want to own bonds and stocks” was one of his comments.

The sharply higher dollar against both the Indian Rupee and Chinese Renminbi, the world's biggest buyers of physical gold may trigger a challenging period for gold, until buyers adapt to higher levels, something that is likely to trigger some pent-up demand, especially in India.

Another worry is Russia and its central bank which holds a major percentage of its reserves in gold. As the unjustified and ill-conceived idea to wage war against a sovereign nation eats into its reserves, the market worry Russia would have to start sell some of their gold. Not least considering it can no longer access the euros and dollars held at private institutions and central banks in the U.S. and Europe.

At the March G7 meeting in Brussels, the group said it would continue to work jointly to blunt Russia’s ability to deploy its international reserves to prop up Russia’s economy and fund Putin’s war. They also specifically said that any transaction involving Central bank held gold would be covered by existing sanctions. That would leave India and China as the two major venues for any undercover sales of gold, a risk we see as being limited, at least at this stage.

From a technical perspective gold needs a break above $1920 in order to force buying from recent short sellers while key support below $1850 on the Comex Gold future is in a band towards $1830. Only a break below that level would begin challenging our bullish view on gold as highlighted in our quarterly outlook.

For a more detailed technical update for gold and silver from Kim Cramer, our technical analyst, please click here.

Source: Saxo Group


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.