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Economy, business and finance
Gold outlook hinges on Fed signals; metal could test $4,200: Kotak Sec
In August, Treasury more than doubled its bond repurchase operations from $2 billion to at least $4 billion per operation
Disclaimer: This article is written by KaynatChainwala, AVP Commodity Research at Kotak Securities. Views expressed are his own. Readers' discretion is advised.
Gold has retraced sharply from its late August peak near $4,700 to lows around $4,250 earlier this week, a pullback of roughly 10 per cent in less than three weeks as a run of inflation data came in above expectations, lifting Fed hike odds close to 90 per cent. The speed and scale of that correction reflects how sensitive bullion has become to the rate narrative, but it also raises a more important question for investors watching tonight's FOMC decision, whether the bulk of the repricing is already behind us.
With hike expectations now heavily priced into markets, the more consequential question for gold is not whether the Fed acts tonight but what the updated dot plot and economic projections signal about the path beyond September. Three or more additional hikes embedded in the dot plot through 2027 would constitute a genuine hawkish surprise and could open the door for gold to test the $4,250 to $4,200 zone and potentially press toward $4,000 in the coming sessions if real yields push decisively higher. Conversely, a dot plot that clusters around a single further increase would likely be interpreted as a softer outcome than current yields imply, helping gold sustain above $4,300 and creating scope for a relief move back toward $4,400 to $4,500.
Two factors outside the FOMC's direct control are worth keeping in focus alongside tonight's decision. The first is the US Treasury's long-end buyback programme. In August, Treasury more than doubled its bond repurchase operations from $2 billion to at least $4 billion per operation, targeting the 10-to-30-year sector where yields had reached levels not seen in nearly two decades. While the Treasury cannot surprise the market with an unscheduled buyback date, it can use its upcoming pre-scheduled calendar dates to announce a further increase in operation sizes. With yields now retesting their pre-announcement levels, whether Treasury chooses to deploy that tool again in response to post-decision pressure is a consideration markets are likely to keep in mind, even if the outcome cannot be anticipated with certainty.
The second factor is the Bank of Japan, which announces its own policy decision in the days following the Fed. Markets have been positioning for a possible BoJ rate increase, and the yen has already strengthened in anticipation. That yen appreciation has already applied some downward pressure on the dollar, which reduces the additional headwind gold would typically face from a firmer dollar following a Fed hike. If the BoJ does raise rates, further yen strength could add to that dollar softness, providing gold with a degree of currency support that runs independently of whatever the Fed delivers tonight.
