Gold has cautiously extended its recovery and is sitting on a seesaw near the top, currently trading around $1,785. Fed policy makers have largely refused to address inflation concerns, stressing that U.S. economic markets are a long way from explaining what Treasury Secretary Janet Yellen said they need to do. A four-session decline in U.S. Treasury yields, coupled with a weak stance in the U.S. dollar, continued to support gold’s gains.
Gold was down 0.10 percent at $1,784.80 as of 8:33 a.m. in Hong Kong.
Fundamental Analysis: Federal Reserve Policymakers have rallied to suppress Yellen’s interest rate hike talk
The Bloomberg Commodity Spot Index hit its highest level since 2011 after U.S. Treasury Secretary Janet Yellen said earlier this week that the Federal Reserve may need to raise interest rates to prevent U.S. markets from overheating. Fed policy makers jumped in to put out the fire, with Fed Vice Chairman Richard Clarid reiterating that the economy was still a long way from meeting the Fed’s goals.
Loretta Mester, president of the Cleveland Fed, said inflation in 2021 would not prompt the Fed to raise interest rates. Michelle Bowman, a Fed governor, noted that inflation would continue to exceed 2 per cent in coming months, but that there was little risk of a sustained overshoot.
Charles Evans, president of the Chicago Fed, believes the Fed is in no hurry to talk about tapering and that inflation is unlikely to get out of control. Eric Rosengren, president of the Boston Fed, said higher inflation was as temporary as last year’s shortage of toilet paper and that it was too early to talk about deleveraging.
Yellen later reinterpreted her statement, saying she neither predicted nor recommended that the Fed raise interest rates as a result of President Joe Biden’s spending plans, and that she did not foresee an inflation problem, but that the Fed certainly had the tools to address it if it did. She also played down investor concerns that Biden’s new economic plan, which focuses on infrastructure spending and household spending respectively, will spur runaway inflation.
In response to Biden’s new plan, Yellen added that the spending, while large, would be spread out over an average of eight to 10 years. While Ms Yellen was keen to clarify that such a move would necessarily create a need for the Fed to raise interest rates modestly, it is clear that the rhetoric has caused market jitters and volatility in commodities and global stock markets.
Fundamental analysis: gold price fluctuations only the stock market correction can solve
Mike McGlone, senior commodities strategist at Bloomberg, argues that the only solution to gold’s turmoil is a pullback in equities, otherwise it cannot break out of the $1,700 – $1,800 trading range. But even if a pullback in equities does occur, gold will have to contend with the new safe-haven darling Bitcoin, which has become gold’s biggest nemesster.
“Almost every market outlook in the world is predicated on the US having to go higher,” says McGlone. “To me that’s a big drawback. If the U.S. stock market stops moving higher, or even goes down 10%, that means Treasury yields will collapse, copper and oil will collapse, and gold will probably be the beneficiary.”
If you look at stock market history, there is always a period of underperformance in the market, and gold and bitcoin have been the biggest beneficiaries. That’s what a gold bull market needs to see, McGlone notes, but the question is whether bitcoin will replace gold as a safe haven for investors when that happens. “You also need to see assets such as copper and silver, which are significant players in an environment where carbon neutrality and electrification needs are growing,” he adds.
The consensus at Bloomberg is that the gold outlook is directionless and heading towards boredom. ‘This is very surprising for investors,’ Mr. McGlone said. ‘Given that Treasury yields and GDP are falling, gold should be the asset of choice, especially with the support of a weak dollar and quantitative easing.’ Mr McGrone also echoes the Fed’s argument that inflation is the necessary driver of gold’s bull market and that any price pressures this year will be transitory.
Gold is hovering around the 100-dma at $1,798 and the 21-dma at $1,770, with the 3-week uptrend line and optimistic MACD indicator biased toward buyers. But gold has to break above $1,800 to get back into the bullish trend.