Gold loses momentum ahead of FOMC

Gold prices gave back earlier gains on Tuesday as fresh Economic Cost Index (ECI) data from the US revealed a significant uptick in wages and employment costs. The precious metal, which had surged to a high of $2,007, plummeted to new daily lows at $1,980.57 in response to the data.

While gold has managed to retain a substantial portion of its gains against the dollar, the latest ECI figures have cast a shadow over dovish Federal Reserve (Fed) expectations, at least for the time being. The increase in employment costs suggested that inflation might persist at elevated levels in the near future, prompting market participants to reassess their outlook on monetary policy.

Investors’ attention this week remains fixated on central bank meetings of both the Federal Reserve and the Bank of England. The Federal Open Market Committee (FOMC) meeting, which commenced on Tuesday morning, is scheduled to conclude on Wednesday afternoon with a statement and a press conference led by Fed Chairman Jerome Powell.

Initially, most market analysts had anticipated a pause in the Fed’s interest-rate-increase cycle, given the recent hawkish tone adopted by the central bank. However, the hot streak in economic data has led to a shift in market sentiment. Many investors are now bracing for a continuation of the Fed’s hawkish stance, as policymakers remain vigilant against the backdrop of persistent inflationary pressures.

Hedge Funds Exit Long Gold Positions

Hedge funds have begun exiting their short positions in the gold market. Recent data from the Commodity Futures Trading Commission (CFTC) revealed that some of these funds were not just closing shorts but also entering new bullish positions.

According to the CFTC’s disaggregated Commitments of Traders report for the week ending October 24, money managers significantly increased their speculative gross long positions in Comex gold futures by 17,748 contracts, bringing the total to 122,456. Simultaneously, short positions fell by 22,897 contracts to 66,708. This shift resulted in a net bullish position of 55,748 contracts, a testament to the changing sentiment in the gold market.

Analysts say this renewed interest in gold to the market’s anticipation of the Federal Reserve maintaining its restrictive interest rates well into 2024. Despite concerns about U.S. monetary policy, the dominant factor driving gold prices remains safe-haven demand.