Gold Specs Betting Fed Will Struggle Taming Inflation

Gold prices slipped on Friday amid a broader decline in commodities, but the market avoided an even steeper sell-off as Treasury yields dropped and the U.S. Dollar edged lower. Nonetheless, the market was lifted for a second consecutive week by inflation concerns and geopolitical risks.

On Friday, April Comex gold futures settled at $1834.10, down $10.80 or -0.59%. The SPDR Gold Shares ETF (GLD) finished at $171.08, down $0.57 or -0.33%.

Gold settled 0.83% higher for the week, as investors sought protection from worries about a possible extension of U.S. sanctions or new European Union measures if Russia attacks Ukraine. However, gains may have been capped by fears of a Federal Reserve tightening.

Bearish Traditional Fundamentals Give Way to Russia-Ukraine Wildcard after Biden Remark…

Prices were edging lower early in the week until U.S. President Joe Biden made a potential invasion of Ukraine by Russia a reality. This news triggered an intraday short-covering rally strong enough to drive gold to its highest level since November 22.

President Biden on January 19 predicted Russia “will move in” to Ukraine, citing existential concerns by the country’s president, Vladimir Putin, even as he acknowledged disunity within NATO over how to respond to a “minor incursion.”

“It’s one thing if it’s a minor incursion and we end up having to fight about what to do and not do,” Biden told reporters at an East Room news conference. “But if they actually do what they’re capable of doing with the forces amassed on the border, it is going to be a disaster for Russia if they further invade Ukraine.”

Critics were quick to point out that, “This gives the green light to Putin to enter Ukraine at his pleasure,” a Ukraine official said.

But the Main Focus Remains on the Fed’s Upcoming Policy Announcements

At its January 25-26 meeting, the U.S. Federal Reserve is expected to announce it will tighten monetary policy at a much faster pace than thought a month ago to tame persistently high inflation, now viewed by economists polled by Reuters as the biggest threat to the U.S. economy over the coming year.

Short-Term Outlook

April gold futures may have inched higher last week, but falling below Wednesday’s breakout level on Friday suggests the rally may have been fueled by short-covering rather than new buyers.

While some bulls are trying to label gold as a safe-haven, it really can’t compete with Treasurys, the Japanese Yen and the U.S. Dollar for protection.

In my opinion, gold is being underpinned because investors are betting the U.S. economy may be in worse shape than the Fed thinks.

The Fed is going to reveal most of its cards next Wednesday, but if its plans are too aggressive then this could mean inflation is going to be a problem for longer-than-expected and central bank policymakers will have a harder time driving it down to its 2% mandate by the end of the year.