Price of Gold Fundamental Daily Forecast – Are Investors Betting Faster Tapering Slows Pace of Rate Hikes?

Gold futures had a roller-coaster session on Friday, underpinned by lower Treasury yields early then pressured as Omicron worries drove investors into the safety of the U.S. Dollar and Treasurys.

U.S. Treasury bond yields finished lower on Friday, though off session lows, as traders assessed the recent hawkish Federal Reserve stance as the bank tries to balance rising inflation against the economic toll of the Omicron coronavirus variant.

The U.S. Dollar rose on Friday as markets approached the end of a busy week in which major central banks laid out plans to unwind pandemic-era stimulus.

On Friday, February Comex gold futures settled at $1804.90, up $6.70 or +0.37%. The SPDR Gold Shares ETF (GLD) finished at $167.81, down $0.35 or -0.21%.

Yield Curve Volatility Driving Wicked Price Action in Gold

U.S. Treasury yields rose on Wednesday but were sharply off the day’s highs after the Federal Reserve announced that it was doubling the pace of its pandemic-era bond purchases, triggering some trader bets that the Fed could take a more muted approach to raising interest rates.

The initial market reaction sent the 2-year yield up 4 basis points and the 2-year/10-year curve flattened, but by the end of Fed Chair Jerome Powell’s press conference those moves had reversed on expectations that the faster taper would allow the Fed to tread lightly on interest rate increases.

Gold prices initially fell on Wednesday to their lowest level since October 11 after the Fed statement was released and yields rose, then rallied late in the session after Powell’s speech and traders priced in the possibly of a slower pace of rate hikes.

Early Friday, gold prices rallied as U.S. Treasury bond yields weakened. Yields edged up in the short end, overall flattening the curve after some sharp steepening moves Thursday, especially on the 5-year/30-year.

The spread between yields on the 5- and 30-year Treasury bond, was at 63.6 basis points, flatter on the day but holding on to some of Thursday’s sharp steepening move. That spread ended at 61.4 bps on Wednesday after the Fed meeting.

What Does It All Mean to Gold Prices?

The volatile price action in the yield curve seems to be the catalyst behind the volatile price action in gold. One reason for the volatility is the possibility of a faster tapering leading to a slower pace of interest rate hikes. Another reason suggests investors have become a little nervous about the recent resurgence of COVID cases.

According to Gennadiy Goldberg, interest rate strategist at TD Securities in New York.

“The market right now is penciling rate hikes a little bit further out the curve. The curve has been steeping over the last few days. It does suggest that the market is getting a little bit more nervous about COVID and is not as confident in the visibility of higher rates.”