Fed minutes hint smaller size of rate hikes: What it means for gold?

Indian gold prices picked up on Thursday tracking an upside in the international prices after US Federal Reserves' latest policy minutes. In the country's national capital, gold prices had crossed over the ₹53,000 mark, and silver surged to reach above ₹62,500 levels. In the minutes, it was indicated that FOMC was of view for slower rate hikes going forward, however, it remains unclear when that may actually happen. Smaller rate hikes are seen as positive for safe havens like gold.

At MCX, gold futures maturing December 5, ended at ₹52,696 up by ₹245 or 0.47%. Meanwhile, silver futures maturing on the same day, closed at ₹62,195 higher by ₹565 or 0.92%.

Furthermore, gold futures in 10 grams maturing on February 3, 2023, finished at ₹53,185 -- increasing by ₹303 or 0.57%. Silver futures in 1 kg maturing on February 28, 2023, settled at ₹63,670 -- soaring by ₹510 or 0.81%.

Meanwhile, COMEX spot gold rose by nearly 1% and was trading at its day's high of $1,758.5 per ounce.

As per FOMC minutes, in regard to the effects of monetary policy actions, the policymakers concurred that the Committee had taken forceful steps to moderate aggregate demand in order to bring it into better alignment with aggregate supply.

The minutes said, "Financial conditions had tightened significantly in response to the Committee’s policy actions, and their effects were clearly evident in the most interest rate-sensitive sectors of the economy, including residential investment and some components of business investment. Several participants commented that monetary policy actions and communications had helped keep longer-term inflation expectations well anchored—a situation that would help facilitate the return of inflation to the Committee’s longer-run goal of 2%."

Nevertheless, with realized inflation well above that goal and the labor market still very tight, the minutes highlighted that the policymakers agreed "that ongoing increases in the target range for the federal funds rate would be appropriate and would help keep longer-term inflation expectations well anchored."

They noted that with regard to both real economic activity and inflation, it would take time for the full effects of monetary restraint to be realized and that these lags complicated an assessment of the effects of monetary policy.

FOMC policymakers mentioned a number of considerations that would likely influence the pace of future increases in the target range for the federal funds rate. These included the cumulative tightening of monetary policy to date, the lags between monetary policy actions and the behaviour of economic activity and inflation, and economic and financial developments.

"A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability," the minutes said.

What does it mean for gold?

Ravindra Rao, CMT, EPAT VP-Head Commodity Research, Kotak Securities said, "The US dollar fell after the release of FOMC meeting minutes on Wednesday. As expected, it showed majority of the policymakers were with the view of slower rate hikes as recent Fed’s aggressive stance is impacting the economic growth.US Dollar index closed near day low of 106.03 in the previous session, a fall by more than 1%."

Rao added, "Although the minutes indicated the end of jumbo rate hikes, the policymakers were uncertain on when will be the endpoint of the rate hikes. Smaller rate hikes by Fed are positive for risk asses as well as for safe-haven assets like gold as dollar weakness supports."

He also said, smaller rate hikes by Fed are positive for precious metals, especially gold which had witnessed deep corrections since Fed started the jumbo rate hikes.

There is a good probability for gold to recovery back to $1762 per ounce followed by $1778 per ounce.