Economic Recovery Challenges Central Banks

As of 5 PM EDT gold futures basis, the most active December 2021 contract is up $4.90 (+0.27%) and is currently fixed at $1798.30. The tailwinds moving gold higher today were a combination of lower yields in United States 30-year bonds and a fractional decline in the dollar index.

Trading in the U.S. dollar index resulted in a fractional decline of -0.06%, or -0.061 points and is currently fixed at 93.88.

The U.S. 30-year Treasury bond is currently yielding 1.955% after factoring in today’s yield decline of – 0.086%. The previous close in 30-year bonds was just over 2% at 2.041%. This is in line with yield curves globally which have all recently experienced a flattening.

The yield differential between the two and 10-year notes has flattened to their smallest yield differential in two months. The yield differential between 5 and 30-year U.S. debt instruments is at its narrowest level since the onset of the pandemic in March 2020.

According to Vivien Lou Chen of MarketWatch, “The bond market’s mood turned downcast on Wednesday as traders questioned the U.S. economy’s ability to handle a potential rise in interest rates by the Federal Reserve next year and the Treasury yield curve flattened as a result, with similar moves playing out across the world.”

This is a concern for the Federal Reserve and all the major central banks, including the ECB (European Central Bank). The ECB’s October meeting will begin on Thursday (Wednesday night in the United States). Market participants expect that the ECB will leave interest rates and the current stimulus program (the Pandemic Emergency Purchase Program) unchanged at least until December of this year, which brings us to the most important aspect troubling the Federal Reserve and central banks worldwide.

The Federal Reserve and ECB are caught between a rock and a hard place

Both the Federal Reserve and ECB are backed into a financial corner as they attempt to deal with inflationary pressures well above their expectation, coupled with slowing economic growth well below their expectations. The primary tool used by central banks to curtail rising inflationary pressures is interest rate hikes, the rock. However, while interest rates could undoubtedly dampen the inflation rate, it would also have an extremely detrimental impact on the global economic recovery, the hard place.

Neils Christensen, Editor at Kitco News, correctly quoted Thorsten Polleit, Chief Economist of Degussa Goldhandel GmbH, to explain the dilemma that currently plagues the Federal Reserve and ECB.

“It should be clear that a monetary policy of interest rate hikes and containment of credit and money supply expansion would be tantamount to an earthquake for the global economic and financial system – because the latest economic recovery has been driven by extremely low interest rates and a most generous supply of credit and money. If central banks meant business and were to combat price inflation by raising interest rates back to ‘normal levels,’ a recession-depression would be inevitable.”

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Wishing you, as always, good trading and good health,

Gary Wagner