International spot gold rebounded on Thursday (March 4), hitting a high of $1,723.27 an ounce, while bulls are trying to stabilize above the $1,720 mark. After a steep decline since the start of the year, investors chose to trim bearish positions ahead of a speech by Fed Chairman Colin Powell. Still, a number of factors keep gold’s rebound room in check, at least for now. Expectations of a relatively quick recovery in the US economy continued to support the dollar, which in turn capped gold’s gains. The positive economic outlook is supported by progress in vaccinations and a large fiscal spending plan.
Fed Chairman Colin Powell is due to speak at a conference hosted by the Wall Street Journal, and comments on monetary policy and bond market turmoil are bound to cause market volatility. It was his last public event before the Fed’s March 16-17 meeting, so it was closely watched by investors, but it was also well known that the bar for real Fed action remains high.
The Fed used a strategy known as Operation Twist in the early 1960s, when it sold shorter-dated bonds and bought longer-dated ones to help pull the U.S. economy out of recession. The Fed did it again in 2011, when it had already anchored short-term interest rates by holding them at zero and lowered longer-term interest rates by buying assets.
Despite the recent short-term spike in 10-year yields, the absolute level of real yields over a longer time horizon is still very low. Therefore, from the Fed’s perspective, such an increase is still acceptable and policy makers will have to wait longer before making a decision.
In economic data, more Americans filed claims for unemployment benefits last week as the COVID-19 epidemic continued to hit the job market. The Labor Department reported 748,078 new “initial claims for unemployment benefits” last week, up 31,519 (or 4.4%) from the previous week. That means initial claims have topped 70,000 for nearly 12 straight months, a level never seen before the first lockdown in March 2020.
MSNBC noted that it was the 50th straight week that claims were above the worst of the “Great Recession.” “Vaccination programs should help the economy recover, but at the same time millions of families are struggling.” Against this backdrop, Mr Biden’s massive fiscal stimulus is all the more crucial.
Technically, FXStreet notes that gold has been following a downward sloping channel for the past month or so. Forming a short term bearish trend pointing well and providing support for a sustained downtrend extension.
So far, however, gold has managed to defend the $1,700 mark, which coincides with the lower boundary of the above channel. In addition, technical indicators on the daily chart are flashing oversold conditions and providing some caution to bearish traders.
Therefore, it is prudent to wait for a sustained break of channel support before positioning any further depreciation trend. Gold is then likely to accelerate its decline to test horizontal support at $1,675 – $70, where a break will head to the next major support around $1,600.
Chris Weston, Pepperstone’s head of research, also echoed the market’s expectations, saying that although sentiment in the gold market had become extremely bearish, it was unlikely to turn around any time soon. Investors need to keep a close eye on Treasury yields as the market appears to disagree with the Fed on the likely timing of future rate increases. “The market disagrees and thinks they’re going to take real risk sooner,” he says. A regime of rising interest rates, with no inflation overruns, is not an important foot in the door for gold.”
It added: “There is a mismatch between the Fed’s interest rate guidance and market pricing, and that is why markets are volatile. ‘Markets are not usually at the hub of central banks, but when they see what is happening and they refuse to listen to the narrative, it can be devastating,’ he said. That means this week will be crucial, with Mr Powell’s speech on March 5th local time playing a crucial role. And a delay in Fed rate hike expectations could be good news for gold bulls.”