Gold, silver hit one-month lows on hawkish Fed: will downtrend deepen?

Gold prices on COMEX fell nearly 1% on Thursday to hit a more than one-month low after the US Federal Reserve dampened hopes for an interest-rate cut at the upcoming meetings.

Despite the Federal Reserve holding interest rates steady at its monetary policy meeting on Wednesday, the gold market is still struggling to establish a stable position.

The Fed's continued projection for lower rates through 2026 is a key factor influencing this sentiment.

The Federal Reserve held interest rates steady, as anticipated, keeping the range at 3.50% to 3.75%.

Despite this, the central bank's revised economic projections indicate a potential interest rate cut this year, with rates projected to decrease to 3.4% by year-end.

Fed policy dampens rate cut hopes

A significant surge in energy prices has fueled inflation worries, which has kept a lid on precious metals’ surge.

Oil prices rallied due to a renewed escalation in the Middle East.

Consequently, markets are increasingly factoring in the risk of disruptions to both energy supplies and shipping routes.

“While geopolitical tensions typically support safe‑haven demand, the inflationary impact of higher energy costs is weighing on gold,” Ewa Manthey, commodities strategist at ING Group, said in a note.

“It’s pushing real yields higher and capping the upside,” she added.

However, despite persistent inflation, the Federal Reserve's interest rate projections remained the same as the December forecast.

This, in the view of some economists, was a slightly more dovish stance than anticipated, as markets had been expecting a more hawkish position.

While offering little specific forward guidance, the Fed expressed optimism regarding the economy's health.

“Available indicators suggest that economic activity has been expanding at a solid pace,” the central bank said in its monetary policy statement.

“The implications of developments in the Middle East for the US economy are uncertain. The Committee is attentive to the risks to both sides of its dual mandate.”

Inflationary headwinds cap gold's upside

The Federal Reserve's more nuanced position is not causing a significant reaction in the gold market.

At the time of writing, the price of gold on COMEX was at $4,839.76 per ounce, down 1.2%, while silver was at $75.120 per ounce, down 3.2% from the previous close.

The central bank's updated economic projections indicate the committee's optimism regarding growth and its view that higher inflation will have only a limited impact.

“The Fed is choosing to look through the fog of conflict, for now. A dual mandate Federal Reserve is not going to rock the interest rate boat during a supply shock,” said Jamie Cox, Managing Partner for Harris Financial Group, in a note.

Some gold investors are frustrated by the recent selloff, particularly since the precious metal hasn't secured a lasting safe-haven status, despite the escalating instability in the Middle East, Kitco.com quoted Ole Hansen, head of commodity strategy at Saxo Bank, in a report.

“The war’s impact on energy markets has lifted inflation expectations at a time when central banks were already cautious about easing,” Hansen said.

“The surge in oil and refined product prices—particularly diesel—has reduced the likelihood of near-term rate cuts and, in some cases, pushed market pricing toward a ‘higher-for-longer’ rate outlook. This has supported real yields, a key headwind for non-yielding assets such as gold,” he said.

Hansen predicts continued struggles for both gold and silver, seeing further downside risk for silver in particular.

“In addition to following gold lower, it is more sensitive to growth expectations due to its industrial use, with copper trading sharply lower as well,” Hansen said.