Gold rebounded from its “flash crash” in Asian trading but still settled at its lowest close in nearly five months on Monday, casting pessimism in its outlook amid expectations of monetary action by the Federal Reserve that could significantly strengthen rival dollar.
The Dollar Index hit a three-week high against a basket of other currencies after Friday’s stronger-than-expected U.S. jobs report spurred bets that the Fed could move more quickly to taper the monthly stimulus of $120 billion it has been providing for the Covid-restrained economy. A rollback in the stimulus and eventual rate hike could spell doom for gold in the near-term.
“Gold is in trouble now that Wall Street is convinced that the Fed will taper its QE program soon, potentially driving Treasury yields and the dollar sharply higher,” OANDA analyst Ed Moya said, using the abbreviation for quantitative easing.
“Gold’s overnight flash crash was a perfect mix of Asia playing catch-up over with their Fed taper bets, plunging commodities as slowdown concerns grow across Asia, and some thin conditions given the holidays in Japan and Singapore.”
Gold’s front-month futures on New York’s Comex settled down $36.60, or 2.1%, at $1,726.50 an ounce, its lowest close since March 31. Prior to the start of the U.S. session, the benchmark gold futures contract plunged to $1,677.90 in the Asian session.
The Federal Reserve could begin tapering between October and December the stimulus it has been providing the US economy, or move even earlier if monthly jobs growth hits close to a million two months in a row, Atlanta Fed President Raphael Bostic said Monday.
“I believe the Fed will begin to trim purchases between October and December but is willing to move it forward if necessary,” Bostic said at a live-streamed event. “If there is another month or two of strong job gains … similar to those in July, the target will be met.”
The Fed has been buying at least $80 billion of Treasury securities and $40 billion of agency mortgage‑backed securities monthly to support US economic recovery since the coronavirus outbreak 16 months ago. It has also kept US interest rates at a record low of between zero and 0.25%.
At the close of the Fed’s monthly policy meeting for July, Chairman Jerome Powell said it wasn’t time for the central bank to discuss revision of either asset purchases or rates. He said focus should instead be on the Fed’s mandates of trying to achieve maximum employment for Americans, defined by an unemployment rate of 4 percent or less, and inflation at 2 percent per annum.
Following Powell’s comments, the Labor Department reported that 943,000 new job positions were filled in July, bringing the unemployment rate down to 5.4% — or less than 1.5% to the Fed target for maximum employment. That has raised speculation that the central bank may move faster on its target for asset purchase tapering.
Since January, gold has been on a tough ride that began in August last year — when it came off record highs above $2,000 and meandered for a few months before stumbling into a systemic decay from November, when the first breakthroughs in Covid vaccine efficiencies were announced.
After initially bottoming out at under $1,675, gold appeared to break its dark spell with a bounce back to $1,905 in May. Since then, it has seen renewed short-selling that took it back and forth between $1,700 and $1,800 for a while before the move again toward $1,600.