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Gold loses 1,800 USD after hawkish FOMC minutes

Volatility increased sharply yesterday as the Fed appears ready to tighten monetary policy faster than previously thought.

FOMC with direct impact

Precious metals plunged sharply yesterday, with the bearish mood continuing today. Ahead of the US session, gold was down half a percent, falling below the psychological level of 1,800 USD. At the same time, silver cratered more than 2%, dropping to two-week lows at 22.30 USD.

Yesterday, the main driver of the financial markets was the FOMC minutes, which sounded even more hawkish than anticipated.

The minutes read: Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.

It looks like the talk about balance sheet reduction has spooked the markets yesterday, as some of the FOMC members talked about the probability of when it might be appropriate to reduce the size of the balance sheet, thus pulling liquidity out of the market.

“In our view, Wednesday’s minutes increased the chances that the FOMC might be ready to reach a decision on the runoff process and issue new normalization principles in the second quarter, which could mean that runoff begins somewhat earlier than our standing assumption of Q4. However, we still expect the start of runoff will substitute for a quarterly hike so that the FOMC would still hike three times total in 2022 if runoff begins in Q3,” Goldman Sachs’ Jan Hatzius commented on the minutes.

Risky assets took the hit

The markets’ reaction to these minutes was pretty straightforward – everything risky was sold-off, including stocks, commodities, commodity currencies, and even cryptocurrencies.

Bonds were also under severe selling pressure, pushing their yields sharply higher. The 10-year US yield advanced to 1.74%, testing the last year’s highs in that region, while the 2-year US yield jumped from 0.75% to 0.86% today.

As a result, gold was smashed lower, falling below the psychological level of 1,800 USD, where the 200-day moving average is also located. Failure to stay above that zone could prompt further selling, targeting 1,780 USD.

More volatility will surely hit the markets tomorrow, as December’s US labor market update is due. Judging from this week’s massive ADP report, we could see a firm NFP number, reinforcing the hawkish narrative, likely sending precious metals further lower.

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