Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Gold: What Fed Rate Hike Of 50 Basis Points Or 75 Basis Points Could Mean

Published 06/15/2022, 04:33 AM
Updated 09/02/2020, 02:05 AM

The Federal Reserve’s largest rate hike in 28 years could be coming later today at 2 PM EST. The question is what will happen to the price of gold—an asset labeled as a hedge against inflation but that relationship has broken down lately due to the runaway strength in rivals, the dollar and US Treasury yields.

Gold Daily

For decades, the Fed had typically used quarter percentage point rate increases to tame inflation. 

But the larger-than-expected 8.6% annualized sting in the Consumer Price Index for May means the Fed might have to resort to unusually strong medicine to curb price pressures that don’t seem to be slowing from four-decade highs.

Gold’s benchmark futures for August lost about $60 an ounce, or nearly 3.5%, on New York’s COMEX over the last two days on speculation that the central bank could resort to a rate hike unseen in decades. 

The Fed’s 25-basis point (bps) hike in March virtually accomplished nothing. The same could arguably be said of its follow-through 50 bps increase in May. 

Of course, if the Fed keeps adding 50 bps at each of its five remaining rate decisions for this year, it could take rates to as high as 3.5% by the year-end from a virtual zero in February.

But the Fed could do even more than 50 bps a month. That’s what investors are fearing and that’s what caused the S&P 500 to become a bear market—down 22% from its Jan 4. high of 4,819—in recent days. 

As of Tuesday, money market traders had priced in a 96.2% possibility of the Fed settling on a 75 bps hike at its June rate decision due on Wednesday. 

A tiny fraction—3.8%—was leaning toward a 100 bps increase; a proposition that seemed virtually impossible just a week earlier.

So, what will gold do if the central bank sticks to convention and does a 50 bps hike? The Fed has raised rates by half a percentage point a total of 44 times, mostly during the ’70s and early ’80s when it was chasing skyrocketing inflation. Since the early ’80s, such big moves occurred only 12 times.

And what could happen to gold in the event of a 75 bps or larger hike? A 75 bps hike or more has only occurred 28 times since the 1970s. The last time was in November 1994, when the Fed hiked rates multiple times in one year in a move to stave off inflation.

We explore the impact on gold from the two scenarios as presented by Sunil Kumar Dixit, chief technical strategist at skcharting.com.

Scenario A: 50 Basis Point Hike

If the Fed announces a 50 bps hike, gold can throw up a $30 - $50 move as an immediate reaction, taking the metal toward $1,850-$1,880.

Meanwhile, eventual volatility can cause a pullback of $20-$30 from there, for gold to back to $1,790-$1,780.

Scenario B: 75 Basis Point Hike

Gold can drop $30-$75 either in a straight go or in phases. 

We can expect a retest of the $1,800-$1,787 levels initially, followed by $1,755. If the sell-off escalates, even $1,730 will be possible.

Overriding Factors

Gold has been trading well below the 100-Day Simple Moving Average of $1,890 and the 50-Day Exponential Moving Average of $1,865 as well as the 200-Day SMA of $1,843

For a couple of weeks now, we have seen the metal being rejected at the $1,880 high, with prices dropping to $1,805 in Tuesday’s session.

This has created a $74 channel for a potential move in either direction after the Fed's decision. 

If gold manages to breakout above the multi-week resistance of $1,880 and gold bulls show enough buying resolve, prices can reach $1,895-$1,910. Any potential short-term bullish breakout rally has high chances to climax at $1,925-$1,935.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Latest comments

@Barani Krishnan  Nobody can predict a future price, not me, neither you. Today's price action is here to demonstrate it. I am actually long Gold short WTI. I based my analysis on the historical positive correlation between the two assets that apparently "broke" in the last few weeks. Gold is also historically one of the best hedges to inflation and OIL historically depreciate when the economy slowdown, I believe what "broke" this correlation was an incredibly strong USD. Sooner or later macroeconomic factors adjust discrepancies
Impressive article
Impressive article
so what next is coming
Happy 75. Wishing you many more happy returns of the 75s.
Congrats, it actually happened the opposite. 0.75% rate hike and GOLD moved higher
Gold's intraday move was within the swing factor of $75 that Sunil mentioned under the overriding factors section of his technicals. Like all markets, it sometimes has the tendency to surprise and gold followed the alternative trade today, the same way the S&P did.  Powell's post-hike remarks about the lack of probability for super-sized hikes (read 1%), the retreating dollar and yields all made sense for the snapback.
You mentioned a drop (scenario B) of 30-75 dollars. Just admit that you were wrong.. thats sometimes better
 Yes, that was not what happened (scenario B) because the market was oversold in the run-up to the 75 bps and you had a classic sell the rumor and buy the news development. I've no problems saying we were wrong in this instance but the fact remains that Sunil had that oversold element cited as well in his overriding factors. Of course, I can be wrong anytime as analyst can be. We aren't God, my friend, though I can sense the perverse thrill that you seem to take in "congratulating" me and Sunil for getting our primary directional call wrong. It's alright; we win some days, we lose on some. It's part of the game. It doesn't dissuade us from doing what we do and having many appreciative readers for that.
Happy 75. Wishing you many more happy 75s
Dixit is consistently wrong. He doesn't give up
It's you who won't give up with $640 gold gibberish Murali. Gold's intraday move was within the swing factor of $75 that Sunil mentioned under the overriding factors section of his technicals. Like all markets, it sometimes has the tendency to surprise and gold followed the alternative trade today, the same way the S&P did.
Murali Krishna. You will be right only when Gold drops to your dream number $640 and until then you are a big time failure and wrong and stubbornly being a subject of ridicule. Come on, if you have nothing logical, do some meditation, it will help you heal.
The two Dixit scenarios must be interchanged. We will have gold dancing all the way to $640, one heck of long dance
What ails you Murali Krishna? Readers here find your $640 no longer amusing and you have nothing logical to say. Grow up.
lol $640....not $650...$625...$640. when gold is $640 I guess the S&P is back to 1000? oil $25 a barrel? next level stu(pid)
no one going to mention the supply glut on gold that just came in from Uganda? this will factor on gold price too.
Well, Uganda said "recent exploration surveys" have shown it has gold ore deposits of about 31 million tonnes and it wants to attract big investors to develop the sector hitherto dominated by small wildcat miners. There will be an appreciable gestation period before all that gold finds it way to the market. Production itself is only expected to start later this year. This doesn't impact the price for now.
News of Uganda too far fetched to call any immediate impact on prices.
Listen genius with all your charts and explanations the Fed cannot raise rates without blowing a gigantic hall in the budget deficit of the US government so it’s only a matter of time before this whole economy collapses buy gold
You everywhere sharing these Gold Nuggets I see.
Sol Wein, this article is about the impact the Fed move will likely have on gold. There are many other Fed-bashing outlets if you want, for you to take out your frustrations on them. Got it, genius?
Good review. Thanks.Gold volatility will make an interesting day.
Thanks Steven. Yes Gold traversing a wider range is opportunity for many who manage risks well.
This article is nonsense. if rates rise 3 percentage points it will take the interest on our debt to 1.4 trillion a year or 0ver 30% of entire budget. Don't look for that to happen. Prepare yourself for decades of stagflation. Can you say Japan?
Oops. .75 move higher and gold moves higher. You really need a thicker skin if you're going to be in this business. I just don't believe the FED, period. Powell gave excuse after excuse for what caused inflation, never mentioning the 9 trillion they printed.
 I repeat: There are many outlets for you to bash the Fed, so go there. I any case, if you haven't noticed, gold's intraday move was within the swing factor of $75 that Sunil mentioned under the overriding factors section of his technicals. As for the Fed, to me the idea of the Fed removing accommodation itself is tacit admission that there's too much liquidity in the system. The action (removal) is what is important.
 Like all markets, gold sometimes (but seldom) has the tendency to go against the grain and it did today, taking the alternative path, the same way the S&P did on Powell's post-hike remarks. The dollar and yields gave back too, making sense for the snapback.
Thanks 👍
You're most welcome, Mohd Izhar. Thanks for being a reader.
I would say: inflation odds are increasing, this is why investors are looking beyond interest rate decision, and this is why 75 bps rate hikes couldn’t pull down inflation, in the opposite it rose up to 8.6%.
Recession odds*
Abdelraziq. Very true. While the Fed is taking measures to tame the untamable, the inflation giant defies its master. Going is not easy for the Fed.
The US needs to inflation to pay off it's debt, I expect inflation to get much worse or at least stay highly elevated to allow for the debt to be paid off.
now gold running at 1826. what will his position in evening today?
This rate hike already priced in markets with a possibility of 75 bps rate hike, recession fears are increasing. That means gold is going to continue his way up. For short positions first target 1,834, for longs 1,853. Best of luck to all.
all factored in 50 points we can hit 1870. 75 points 1850. but then the only way is up!!
Gold is known for moving contrary to popular estimates. It loves to throw unpleasant surprises.
thank you, Sir
Thanks man for sharing this with us
Thanks for reading, Roro Retno and the2775kingTD
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.