Gold suffered its biggest one-day percentage drop of the year on Thursday as a hawkish turn by the Federal Reserve lifted the U.S. dollar, sending prices for bullion to their lowest settlement in nearly seven weeks. Essentially, officials revising the timetable for interest rate hikes have brought a taper tantrum for the gold price. For investors, the opportunity cost of holding non-interest bearing assets have increased and gold has become a less attractive asset for them for now. Recent data showing surging prices had led many to believe the Fed would at least begin early discussions about reining in some of its ultra-accommodative policy aimed at cushioning the economy from the COVID-19 pandemic, but the policy statement was more hawkish than some expected. Gold prices have been under pressure, losing more than 5% so far this week. Based on the most-active contracts, Wednesday’s decline would mark the biggest one-day percentage drop since Nov. 9, when prices fell 5%. But commentators believe this sharp move lower is probably a temporary one, and the market will likely see, at a bare minimum, a mean reversion until the next catalyst arrives. That catalyst may come when Basel III international regulations come into play on June 28 for European banks, when gold will be reclassified to a Tier I asset, alongside cash and currencies, from a Tier III asset, the riskiest asset class. Since gold will have ‘risk free’ status, this could prompt banks around the world to continue to buy more. Investors should hardly be surprised about the prospects of a Fed interest rate increase in 2023, though the combination of a stronger U.S. dollar and rising yields do pose big hurdles for the precious metal. Whether it justifies a price slide on this scale is another matter, however. After all, gold had already fallen in recent days in anticipation of a possible change in direction on the part of the Fed. In most commentators opinions’, interest rate increases in two years’ time are too far off to warrant any such slump in price, especially as yields are well below the expected rate of inflation.

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