Gold tumbles again from $2,000 high as Fed said to stay tough on inflation

© Reuters.

By Barani Krishnan

Investing.com -- Fears over the U.S. banking crisis seem to be abating and the Fed is expected to stay tough in the fight against inflation. That meant only one thing to investors who had plowed into gold since last week: Sell.

Gold prices sank for a second day in a row from the above $2,000 high hit on Monday, with the front-month April gold futures contract on New York’s Comex losing $41.70 on the day to settle at $1,941.10 an ounce. Combined with the previous session’s slide, April gold has lost $51. The drop was sharper, at nearly $75, if taken from Monday’s one-year high of $2,014.90.

The spot price of gold, more closely followed than futures by some traders, was at $1,940.10 by 16:07 ET (20:07 GMT), down $38.85, or 1.96%, on the day. Spot gold hit a one-year high of $2,010.19 on Monday.

Gold broke out suddenly last week amid heightened concerns that a U.S.-to-Europe banking crisis could spill over into the broader global economy.  Those concerns over the liquidity crisis at banks, however, abated since midday Monday as Swiss investment bank UBS (NYSE:UBS) said it would buy beleaguered peer Credit Suisse (NYSE:CS). In the United States, JPMorgan (NYSE:JPM) appeared to make progress in the rescue of First Republic Bank (NYSE:FRC), after last week’s federal takeover of regional U.S. banks Silicon Valley and Signature. 

Gold longs had initially expected the current momentum to rewrite the $2,078.80 record high for futures and the all-time peak of $2,072.90 for spot gold. 

But the market slide of the past 24 hours showed the yellow metal might have to build more strength at lows to make another strong push forward, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“As prices sustain below $1,968-$1,978, we can expect further correction towards the support areas of $1,932-$1,928,” said Dixit. “Breaking and sustaining above $1,968-$1,978 is the only way to put gold back on the bullish path of resuming the uptrend, which targets $2,010 initially, followed by $2,040 and $2,056.”

Also testing the mettle of gold bulls will be the Fed’s actions over the next 24 hours.

Traders across markets — not just in gold — will be dissecting with surgical precision Fed Chair Jerome Powell’s news conference after Wednesday’s rate decision for key takeaways on inflation, the U.S. economy and future rates. 

The Fed is expected to approve another 25-basis point hike at its March 22 meeting, bringing U.S. interest rates to a peak of 5%, and advocate further increases that will help it catch up with inflation, which grew at an annual rate of 6% in February. 

The Fed intends to bring inflation back to its long-term target of 2% per annum and has said it will rely as much as possible on rate hikes to do that, having already raised 450 basis points over the last year. 

The banking crisis is, however, weighing on the Fed’s plans as many on Wall Street are blaming that on the central bank’s rate increases instead of what appears to be reckless risk-taking by the executives of the banks that went under. There is pressure now on the Fed not to do any more rate increases. So far, Powell has shown no signs of capitulating to such emotional blackmail. 

“In previous episodes of sudden financial distress outside the Great Financial Crisis, the Fed often responded with easing in its policy stance…However, the current circumstance is more unique, as the Fed has a stubborn inflation problem at hand next to financial market instability,” TD Cowen, a unit of TD Securities, said in a note on Tuesday.