Gold prices hinge on FOMC decision as speculators and ETF traders sour on XAU

Gold prices are little changed ahead of the FOMC rate announcement; speculators and ETF traders are losing confidence in the XAU trade and the Swiss National Bank and Bank of England are also on tap this week.

Gold prices are little changed, holding around the 1,675 level after last week’s big drop when bullion sank to its lowest level since April 2020. The yellow metal is now well on track to record its sixth consecutive monthly loss amid a period of high inflation, something that has helped bullion prices in the past but not always.

US consumer prices rose 8.3% in August from the year prior, according to the latest consumer price index (CPI) released last week.

That CPI print was a negative for gold, as it boosted Treasury yields on the view that the Federal Reserve would have to respond accordingly. Higher interest rates make gold less attractive because it doesn’t pay interest or dividends, thereby increasing the opportunity cost for traders. The policy-sensitive 2-year yield is trading within 5 basis points of 4%, the highest mark since October 2007. Gold was trading around 750 back then.

A 75-basis point rate hike is the most probable outcome for Wednesday’s FOMC announcement, but overnight index swaps show around a 1-in-5 chance for a 100 basis point move. The updated summary of economic projections (SEP) is another consideration for bullion traders, as it provides insights into the central bank’s outlook on inflation and growth as well as the “dot plot,” which maps out where voting members see rates in the coming years.

The CFTC’s commitments of traders report (COT) for the week ending September 13 showed that speculators decreased their long bets on gold by 5,314, while short bets increased by 1,708. That is the lowest number of long positions among non-commercial traders since June 2019. The total known exchange-traded fund holdings of gold dropped to 98.9 million on Monday, the smallest amount since January 2020 and on track to fall for a fifth consecutive month.

While XAU prices hinge on this week’s central bank decisions, especially the FOMC, waning confidence among bullion traders is concerning. Although not as impactful, the Swiss National Bank and the Bank of England are expected to deliver rate hikes this week, as well as broadening the negative impact of higher rates on bullion prices.

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