Investors Concentrate on China and Fed Statements, Putting Pressure on Gold

Gold futures basis for the December 2022 Comex contract is $1740 as of 4:48 PM EST, after adjusting for today's fall of $14, or -0.80%. In a few of days, the most active or front month for gold futures will switch from December to February 2023. Currently, the Comex gold contract for February 2023 is down $14.10 and set at $1754.70.

The December silver futures contract is also trading lower today. Futures for December are currently down -2.59%, or $0.56, and set at $20.87. The most active front-month contract for silver futures is likewise shifting from December to the March 2023 contract, which is currently down 54.9 cents, or -2.59%, and is fixed at $21.065.

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Why have the prices of gold and silver dropped today?

Today's weakness in both gold and silver is the result of a combination of factors. Concerns over large protests in China are prominent. According to the New York Times, after a weekend of clashes between officials and protesters, video footage from two sites in Shanghai and Beijing revealed a substantial security presence.

Citizens of China have demonstrated against China's harsh Covid restrictions and lockdowns, resulting in countrywide demonstrations. Investors are concerned that lockdowns and stringent restrictions will stifle economic growth in China, the second-largest economy in the world.

Several members of the Federal Reserve have been quite vocal about expected interest rate increases. James Bullard, president of the St. Louis Fed, is one of the Federal Reserve's more hawkish members. Last week, he stated that the Federal Reserve's benchmark rate should go to as much as 7 percent in order to combat inflation.

When asked this week by Greg Robb, an editor at MarketWatch, how long he expects the fed funds rate to remain in the 5% to 7% range, he stated that "the Federal Reserve will likely need to keep its benchmark policy rate above 5% for the majority of 2023 and into 2024 in order to successfully combat inflation."

During his interview with MarketWatch, he also stated, "It appears that markets are still underestimating the extent to which the Fed will need to maintain a restrictive monetary policy in order to rein in inflation, explaining that there is still some hope that inflation will decline on its own."

When Chairman Powell talks on Wednesday at an event organized by the Brookings Institution in Washington, investors are wondering if he would tone down his aggressive stance. Current consensus holds that the Federal Reserve will increase its benchmark rate by 50 basis points in December.

However, the likelihood of a 50-basis point rate increase has decreased. There is a 67.5% chance, according to the CME's FedWatch program, that the Fed will raise its benchmark rate by 50 basis points at the final FOMC meeting of the year. A day ago, the CME's FedWatch program predicted a probability of 75.8%, and a week ago, it predicted a probability of 80.6%.