Price of Gold Fundamental Daily Forecast – Short-Covering on Speculation Fed May Take Steps to Flatten Yield Curve

Gold is trading higher for a second session on Tuesday. It’s not so-called “safe-haven” demand driving prices higher, but good old-fashioned weaker Treasury yields. The same notion creating the volatility in the Dollar/Yen the past two days is also driving up gold prices today.

As Reuters put it, “Japanese investors have clipped the wings of a resurgent U.S. Dollar as they position for the likelihood that the U.S. Federal Reserve will take steps to flatten the Treasury yield curve.” The same goes for gold.

To be brief, if the yield curve is flattening, it indicates the yield spread between long-term and short-term bonds is decreasing … A flattening yield curve may be a result of long-term interest rates falling more than short-term interest rates or short-term rates increasing more than long-term rates, according to Investopedia.

Why is flattening the yield curve important to the Fed? Because in order to keep interest rates at near zero it can’t have Treasury yields taking off to the upside. If Treasury yields get too high then the Fed may have to buy Treasurys to push yields lower and thus increase its balance sheet.

At 11:57 GMT, August Comex gold is trading $1715.20, up $10.10 or +0.59%.

Last week’s improving U.S. economic data, especially Friday’s surprisingly strong U.S. Non-Farm Payrolls report sent U.S. Treasurys screaming higher. To some, it was the hope of a quick recovery and rising demand for risk that drove gold to its lowest level in two months.

The move in yields probably caught the eye of Fed policymakers which means Chairman Jerome Powell may have some say in the matter.

At the start of today’s two-day Fed meeting and Wednesday’s announcement at 18:00 GMT, investors will be looking for signs that the central bank may engage in policies that cap yields for certain maturities this year, in a move known as yield-curve control.

The Wall Street Journal reported Fed officials were particularly interested in how its counterparts in Australia had adopted a policy of capping yields for all bonds set to mature before a set date, as a way of underlining the central bank’s commitment to keeping policy accommodative.

Short-Term Outlook

If the Fed takes action to flatten the yield curve then expect the U.S. Dollar to weaken and for gold prices to rise. If the Fed refrains from any action to flatten the yield curve then look for gold to extend its recent losses.

Some say the U.S. yield curve is not out of control and any attempt to flatten it by the Fed may not be necessary at this time. Nonetheless, the news is important enough to trigger Tuesday’s short-covering rally in gold.

For a look at all of today’s economic events, check out our economic calendar.