Gold Prices Fall to Start a Volatile Pre-Fed Week

Gold's behavior in the last 72 hours before the Federal Reserve's rate decision for July is as expected: unpredictable.

New York's Comex gold futures for August delivery closed $8.30, or 0.5%, down at $1,719.10 per ounce, after a low of $1,712.95 and a high of $1,733.30.

Since last week's first positive finish in six weeks, capital flows into bullion have grown, despite an earlier plunge to 16-month lows below $1,688.

However, not everyone believed that gold was impervious to another slide below $1,700.

Craig Erlam, an analyst at the online trading platform OANDA, said that gold dealers were seeking to determine whether a recovery had begun, adding that 10-year U.S. interest rates were encouragingly below the vital 3 percent level.

"We may have to wait until Wednesday to see which of the two it will be, with the Fed's policies and their potential recessionary effects influencing the outcome," Erlam added.

Since it hit record highs above $2,100 in August 2020, gold has failed to live up to its reputation as a hedge against inflation for the most of the previous two years. The dollar's ascension, which is up 11 percent this year and 6 percent in 2021, has contributed.

Gold for delivery in August on the Comex climbed by 1.4% last week, but only after a five-week fall that cost bulls $172, or 9% of their value.

The Dollar Index, which measures the dollar to six major currencies, fell for the third day in a row on Monday, hovering around 106.5 after hitting a 20-year high of 109.14 on July 14.

As the Federal Reserve prepares to conduct its fourth rate hike of the year, this week volatility may be the name of the game for gold and other commodities. The Federal Open Market Committee's rate decision will be followed by Jerome Powell's press conference, during which traders will attempt to interpret economic signals.

In July, there will be another 75-basis point hike, just as there was in June, according to over 80 percent of analysts. If so, rates would reach a range of 2.25 to 2.50 percent by the end of this month, up from a range of 0 to 0.25 percent before February's increases.

The Fed's officials anticipate that rates will reach a peak of 3.5% or maybe 4% by the end of the year, with three more rate decisions to be made this year.

However, traders in the money market are also pricing in rate cuts by 2023 if the adverse economic implications of Fed rate hikes prove to be too severe. This followed a week in which wagers hit 70 percent, culminating in a record 100 basis point rise in July.

The fact that the market is even contemplating a fall in interest rates by next year suggests to experts that the likelihood of a Fed-induced recession happening between now and then is rather high.

In the first quarter, the U.S. economy contracted by 1.6%, and a negative second quarter is all that is necessary to formally declare a recession. On Thursday, a day following the Fed's rate decision, the first GDP data for the second quarter will be revealed.