Gold Bugs Face Danger From U.S Federal Reserve Bank
The price of gold fell for a fifth straight session, dropping to its lowest level in about three weeks, breaching the psychologically important value of $1,800 an ounce again.
The December gold contract finished at $1,783.80 an ounce, its lowest level since November 3.
In the aftermath of Jerome Powell’s re-nomination, real yields have spiked, alleviating some inflation concerns, and gold prices have suffered.
Rate hikes are now expected in June, possibly sooner, and up to three next year. In a few weeks, the Fed dot plot may confirm those expectations.
The US president, Joe Biden, nominated Federal Reserve Chair Jerome Powell to a second term and Fed Governor Lael Brainard to the vice chairmanship.
The Fed policymakers on Monday emphasized their commitment to reducing inflation pressures, with their remarks prompting an increase in the odds of a Fed rate hike, nominal Treasury yields, and the US breakeven inflation rate – a measure of forward-looking price expectations.
In the end, US real yields have risen dramatically. The drop in real yields in recent weeks has been a major catalyst for gold prices. However, that catalyst has now been ripped apart.
Although US inflation rates are likely to remain elevated over the coming months, which might prevent gold prices from falling sharply, the Fed’s renewed focus on combating inflation with a faster tapering schedule and possible rate hike sooner than anticipated might prevent gold prices from further rallying.
In contrast to other asset classes, gold prices are historically correlated with volatility.
The gold market tends to benefit in periods of higher volatility, unlike other asset classes such as bonds and stocks that dislike increased volatility. Higher volatility signals more uncertainty about dividends, coupons, etc.