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Gold and Silver Tumble as 'High Rates' Powell Strikes Again

GOLD tested last week's 2023 lows on Wednesday and silver prices fell to 4-month lows against a rising Dollar as global stock markets also extended yesterday's steep drop after US central bank chief Jerome Powell said the Federal Reserve is set to raise and keep interest rates higher for longer to fight inflation. 
"The ultimate level is likely to be higher than previously anticipated...We need to continue to tighten," the Federal Reserve chairman told Congress in his semi-annual testimony on inflation and monetary policy, adding that the Fed will also continue "significantly reducing" the $7 trillion pile of government and mortgage-backed bonds bought through QE during the global financial crisis and Covid pandemic to keep a lid on longer-term interest rates.
Betting on this month's Fed meeting flipped in response, with the odds of a half-point hike now put at 3-in-4 – the same likelihood put on a quarter-point rise only at the start of this week.
"Gold [is] testing toward late-Feb support levels after being hammered overnight," says a trading note from Swiss bullion refining and finance group MKS Pamp, adding that "Silver has dipped below $20 for the first time since Nov last year."
Now down by almost 1/5th from early February's 9-month high, the silver price today edged back above $20 per ounce after losing 2/3rds of its rebound from last summer's 2-year lows. 
Gold prices for London settlement meantime traded some 1.7% below yesterday morning's London benchmark price, the steepest drop since blow-out US jobs data for January spurred a surge in hawkish betting in the interest-rate markets.
With the S&P 500 index of US shares now more than 17% below New Year 2022's all-time high, Fed interest rates are already above the latest pace of growth in the US economy, a "restrictive" stance not seen since 2007, eve of the global financial crisis.
Chart of US annual GDP growth (blue) vs Fed Funds interest rate. Source: St.Louis Fed
"The full effects of our tightening so far are yet to be felt. Even so, we have more work to do," said Powell to lawmakers in Congress on Tuesday.
"You are gambling with people's lives," challenged Democrat senator Elizabeth Warren, telling Powell that "you cling to the idea that there's only one solution – lay off millions of workers."
"Will working people be better off," the Fed chair replied, "if we just walk away from our jobs and inflation remains five or 6%?"
Appointed in February 2018 by Republican president Donald Trump, Powell was over the next 18 months lambasted by the real-estate tycoon for supposedly being "a low-interest-rate guy... Turned out that he's not" as the Fed continued the rate-hiking cycle begun by Powell's predecessor Janet Yellen, now Secretary of the Treasury under Trump's Democrat successor in the White House, Joe Biden.
The Powell Fed then paused and started to cut rates in summer 2019 when the bond market signalled recession ahead with an inverted yield curve.
Here in 2023, the most closely-followed yield curve gap today set a new 4-decade record inversion, with 2-year Treasury bonds – now offering new buyers more than 5% per annum, the highest return since June 2007 – yielding 1.08 percentage points above 10-year bonds.
That snaps the typical pattern of longer-term loans costing borrowers more per year than short-term loans, and suggests that interest rates will have to fall in future.
During the Fed's 2015 to 2019 hiking cycle, and with rates going from 0% to a peak of 2.5%, gold rose some 35% in Dollar terms while US consumer-price inflation rose by half-a-point to 1.7% per year.
The current Fed hiking cycle starting in March last year has so far taken overnight rates from 0% to 4.75%, with the gold price slipping by 3% as CPI inflation has slowed from 8.5% to 6.3%.
"[Fed] hawkishness is perhaps slightly surprising given the continued slowdown in the United States' housing market and a downward revision to GDP growth," says a note from bullion-market analyst Rhona O'Connell at brokerage StoneX.
But with US jobs data due Friday – and today's private-sector ADP Payrolls estimate blowing past consensus forecasts for February – stubborn inflation data "will have underpinned the views of the hawks" among Powell's FOMC colleagues.
Overall, "Gold [is] likely constrained by rate concerns, supported by geopolitics," O'Connell says, pointing to worsening US-China relations and the continued war in Ukraine.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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