In the wake of a sharp drop Thursday, gold may struggle to see heights over $1,300 an ounce again as the tailwinds from central banks on an easing bent stalled when faced with the Federal Reserve's resolve.
"Gold (CEC:Commodities Exchange Centre: @GC.1) is set for another bearish year," Howie Lee, an analyst at Phillip Futures, said in a note Thursday before the metal's decline in U.S. trading hours. He cited a "strong signal" of interest rate hikes ahead based on changes in the U.S. Federal Open Market Committee statement Wednesday.
"A hawkish U.S. Federal Reserve adds negative pressure on gold, as higher interest rates and a stronger dollar (Exchange:.DXY) dims the appeal of gold as an alternative asset," Lee said.
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In a unanimous vote, the FOMC said that "it can be patient in beginning to normalize the stance of monetary policy," but dropped "considerable time" from its assessment of how long rates would remain in its 0-0.25 percent target range.
The unanimity really drives the interest rate nail in gold's coffin, he said. "Even the strongest of doves agree that given the pace of economic activity in the U.S., a rate hike now looks more necessary than ever," Lee said. He expects gold will test levels below $1,200 an ounce once the Fed actually hikes rates.
Gold plunged more than 2 percent during trade Thursday in the U.S., with the spot price trading as low as $1,251.86 an ounce. In early Asian trade Friday, the spot price was around $1,260 an ounce.
The yellow metal had received a fillip earlier this month after the Swiss National Bank (SNB) on January 15 surprised the markets by scrapping its currency peg against the euro (Unknown:EURBA=) and cutting its interest rates deeper into negative territory.
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A second bump higher came after the European Central Bank (ECB) announced a larger-than-expected quantitative easing (QE) program to counter concerns the Eurozone may fall into deflation amid low growth. Gold shot up to around $1,307.80 an ounce, over the $1,300 technical level and its highest since August, as speculators sought out the metal as both a safe haven and as it is seen as a hedge against inflation and currency weakness.
But it's since erased much of its rise from the pre-SNB level around $1,230, likely in part due to the surge in the Swiss franc (Exchange:EURCHF=) - considered a safe-haven asset on its own - creating competition for safe haven flows that might have sought out gold as a safe harbor as market went risk off on the SNB's move.