Gold Price Volatility Persists Amid Fed Rate Hike Uncertainty

Article Highlights

• Spot gold prices decline following hawkish Federal Reserve statements.
• Economic uncertainty continues to underpin gold prices.
• Global financial markets experience volatility due to interest rate concerns.
• Physical gold demand in Asia remains weak.
• "Gamma squeeze" contributed to gold price surge this week.

Spot gold prices retreated on Friday, relinquishing earlier gains after hawkish comments from Federal Reserve officials dampened prospects for a December rate cut. However, despite the pullback, gold remains supported by widespread economic uncertainty, keeping it on track for a weekly gain.

During the session, spot gold reached a high of $4211.06 per ounce before gradually declining. The decline accelerated during US trading hours, with the price nearing $4030 per ounce, marking a daily drop of over $130, or more than 3%. Spot silver prices also experienced a sharp decline of 4%, approaching $50 per ounce. New York silver futures fell by as much as 6%.

Ricardo Evangelista, analyst at ActivTrades, noted that "gold prices are receiving support from the general risk-off sentiment across financial markets... However, the absence of fresh economic data is fueling doubts about the Fed's ability to cut rates in December, limiting the upside for gold prices."

The pullback comes as the US government has reopened after a record 43-day shutdown, which disrupted the release of key economic data. However, the White House has dampened hopes for economic clarity, stating that October unemployment data may not be released.

Evangelista added, "Falling stock prices are triggering margin calls, forcing investors to liquidate positions to meet requirements, which could also put pressure on gold prices."

Global markets were negatively impacted by the hawkish signals from the Fed, with stocks experiencing a sharp decline on Friday. The European Stoxx 600 index extended its decline to 1.5%, hitting a new intraday low. The German DAX index fell by 1.4%, the French CAC40 index fell by 1.32%, and the UK FTSE 100 index fell by 1.1%. Earlier, stocks in both Japan and South Korea closed lower, with the Korean Kospi index falling by nearly 4%.

Amid the heavy selling pressure in stock markets, currency markets experienced increased volatility on Friday, with investors flocking to safe-haven currencies. Recent trading showed a decline in the US dollar against both the Swiss franc and the Japanese yen by 0.5% each.

The cryptocurrency market also experienced a significant decline, with Bitcoin falling by as much as 5% during the day, while Ethereum fell below $3100 per unit.

Despite the Fed having cut interest rates twice this year, some officials have cited concerns about inflation and the relative stability in the labor market, weakening expectations for further rate cuts.

According to the CME Group's FedWatch tool, traders currently see a 49% chance of a 25-basis-point rate cut in December, down from 64% earlier this week.

However, Alex Ebkarian, Chief Operating Officer at Allegiance Gold, pointed out that "as the cost of the shutdown becomes clearer and more spending plans gradually move forward, the dual uncertainty environment regarding inflation and growth will be favorable for precious metals." Non-yielding gold typically performs well during times of economic uncertainty and low-interest-rate environments.

Meanwhile, physical gold demand in major Asian markets has been weak this week, with high prices discouraging purchases, and gold discounts in the Indian market reaching their highest level in five months.

This week's surge in gold prices may have been amplified by a so-called "gamma squeeze," a technical pattern in which traders who sell cheap options are forced to buy gold futures to hedge. In thinly traded markets, any sudden rise in prices increases the urgency to buy, and may evolve into a price surge in the absence of new demand from physical buyers.

In a report released on Thursday, TD Securities strategist Daniel Ghali said that this week's rebound in gold prices aligns with this dynamic, and that the recent decline in over-the-counter trading volumes makes the market more vulnerable to shocks. He added, "This liquidity vacuum may have been the key factor that triggered a 'gamma squeeze', leading to the second wave of significant increases in gold prices this week."

Although gold prices have fallen back from last month's record high of over $4380, they are still up nearly 60% so far this year, and are on track to record their best annual performance since 1979.