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Looking to the Futures

Inflation Hedge Gold Disappoints with Underperformance

Key Points
  • Pace of Rate Increases may Overwhelm Gold’s Inflation Hedge Capabilities

The saying “you can’t fight the Fed” has been a recurring theme recently, and for the second time in January the U.S. Federal Reserve has made disclosures that have sent gold prices sharply lower. January 5th brought FOMC minutes from the December meeting, which sent gold down about 2% in the days after the news. Details of the minutes revealed a hawkish tone with the potential for more interest rate hikes than expected, potentially starting in March, along with more aggressive monetary tightening.

Thursday’s price action in gold futures had the April 2022 contract slipping below $1800 a day after the Fed concluded its two-day meeting with a press conference that may have seemed more hawkish than some had hoped. Thursday’s drop saw the April contract print as low as 1796.10, which would be the second-biggest one-day decline this year, exceeded only by the January 6 selloff. The $1800 level remains somewhat of a psychological barometer as the yellow metal has hovered near that level for the last six months, but April gold futures have moved lower now and trade near $1786.     

Coming off a weak year in 2021 when gold futures posted a 3.5% loss, the worst in six years, investors may be looking elsewhere for risk management solutions. Average daily gold futures volume dropped 25% in 2021 from 308,804 to 232,004 contracts per day, marking the lowest volume in 5 years. But to be fair, gold futures traders may have been front running the inflation trade to some degree, as the yellow metal pushed to all-time highs above $2000 in the summer of 2020. In 2019 and 2020 gold futures were up 18.9% and 24.4%, respectively.

The recent drop in gold futures has erased decent YTD gains after investors thought inflation would continue to outpace rate hikes. The more hawkish tone from the Fed has thrown caution to that thesis as Wednesday’s press conference didn’t rule out rate bumps at each Fed meeting this year. But still there are calls for a rally, including reports from Bloomberg that Goldman Sachs increased their outlook on 12-month gold to $2,150 per ounce, up from $2,000 prior to the Fed meeting this week.

Gold Futures

Gold futures contracts offer high leverage, requiring about 3.7% initial margin for overnight positions. The April 2022 contract, controlling 100 ounces, recently traded at $1,786 an ounce. Recent extremes for gold prices include a low near $600 in pre-financial crisis 2006 and a high near $2,051 in August of 2020. 

Implied volatility for gold futures options is currently hovering near 13 for short-dated (27 days) near-the-money options, while longer-dated options with late May expiration show readings just above 14.  

Technicals April 2022 Gold Futures GCJ22  

As of Friday morning, April 2022 gold futures have slipped below numerous moving averages, setting up concern on intermediate and long-term performance.  

Resistance 2      1869.90

Resistance 1      1850.90

Pivot                   1833.70

Support 1           1814.70

Support 2           1797.50

9-day SMA          1832.50

20-day SMA       1822.70

50-day SMA       1809.80

200-day SMA     1810.70

10-day RSI          42

Contract Specifications

Trading Calendar

Weekly Gold Options Expire  01/28/2022

1st Notice Feb. Gold Futures   01/31/2022

Jobless Claims                           02/03/2022 8:30 a.m. ET

Employment Report                02/04/2022 8:30 a.m. ET

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