Gold prices ease as investors brace for Fed rate outlook

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Nov 3 (Reuters) – Gold prices eased on Wednesday as traders cautiously awaited the outcome of the U.S. Federal Reserve policy meeting where the central bank is likely to announce tapering of its economic support and also address growing inflationary risks.

Gold is traditionally viewed as a hedge against inflation, but reduced stimulus and interest rate hikes tend to push government bond yields up, raising the opportunity cost of holding bullion, which pays no interest.

Spot gold was down 0.4% at $1,780.90 per ounce, as of 0526 GMT. U.S. gold futures dropped 0.4% to $1,781.30.

The Fed is expected to announce the start of stimulus tapering at its policy announcement at 1400 GMT. It is likely to begin paring its monthly asset purchases by $15 billion each month until ending them by mid-2022.

Investors will also look out for any clues as to when the U.S. central bank might raise interest rates to contain growing inflationary pressure.

“In the short-term, gold could remain under pressure because a lot of central banks will be tilted toward normalizing monetary policy, gradually tapering their asset purchases, especially higher inflation,” Hitesh Jain, lead analyst at Mumbai-based Yes Securities said.

“But, if bond markets are right in their expectations for higher inflation and lower growth – stagflation, in the years ahead, that should be quite bullish for gold,” Jain said, noting that subdued longer-term U.S. bond yields reflected concerns of stagflation.

Market participants are also eyeing a Bank of England policy meeting on Thursday after data suggested unemployment is unlikely to rise sharply, bolstering the case for the first rate hike by a major central bank since the coronavirus crisis.

Spot silver fell 0.5% to $23.40 per ounce. Platinum dropped 0.4% to $1,034.03, while palladium rose 0.6% to $2,022.53.

(Reporting by Nakul Iyer in Bengaluru; Editing by Ramakrishnan M. and Sherry Jacob-Phillips)

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