Gold Plunges to 7-Week Low After Yellen Statement

Gold prices plunged to their lowest in seven weeks after Janet Yellen, chair of the Federal Reserve, spoke before Washington lawmakers. While market participants have been following the comments of central bank officials for months in an attempt to determine when the financial institution will decide to push its benchmark rates higher, Yellen’s testimony revealed the financial institution is readying itself to consider potential increases on a “meeting-by-meeting” basis. 

Shifting sentiment

Peter Buchanan, who works for CIBC World Markets in Toronto as senior economist, emphasized that the Fed chair’s latest comments point to policy makers preparing for a rate hike, according to Reuters. 

“The initial negative was the shift in emphasis. Whereas the Fed’s last statement showed a fair (sized) bloc worried about raising rates prematurely, Yellen seemed to be laying the groundwork for an increase, at least in the first part of the testimony,” he told the news source. 

Falling gold prices

After she provided these statements, spot gold declined roughly 0.8 percent to $1,190.91 per ounce, the contract’s lowest level in seven weeks, according to the media outlet. Later, spot gold recovered somewhat, rising to $1,199 an ounce. April gold also moved lower, falling $3.50 per ounce to settle at $1,197.30 on the Comex division of the New York Mercantile Exchange. 

These price movements happened amid fluctuations in the U.S. dollar, which rose and then declined slightly, the media outlet reported. The currency experienced these movements at a time when the greenback has enjoyed sharp gains lately, rising to an 11-year high against a basket of other currencies in January. 

Economic improvement

During her speech, Yellen pointed to the improvement the economy has enjoyed, emphasizing that the labor market has been getting more robust. If business conditions keep growing stronger, this development could motivate further interest in the U.S. dollar. 

Continued improvements in the value of the greenback relative to other currencies could easily provide headwinds for gold, as a rising dollar generally places downward pressure on commodity contracts denominated in the currency. 

While she provided optimistic comments about the U.S. recovery, she did emphasize that inflation is falling short of the central bank’s target rate. While the price level continues to rise less quickly than desired, the Fed will have greater flexibility to harness monetary stimulus. 

Potential headwinds

In addition, Yellen spoke to economic challenges overseas, including deteriorating growth in both the eurozone and China, according to The Wall Street Journal. She noted her concerns that if policy makers remove the word “patient” from their communications, market observers will take it to mean the financial institution will increase rates soon. 

“Ms. Yellen is giving the sense that the Fed has no reason to hurry and will be somewhat patient,” Peter Hug, global trading director at Kitco Metals, told the news source. However, “the sense of people starting to feel better about the economy is a trend that takes away some of the market’s nervousness and the need to own gold from a safe-haven perspective.” 

Investors who trade gold might benefit from knowing about the potential implications the Fed testimony has for market sentiment and gold prices. Being aware of these factors could increase the chances of them meeting their investment objectives.