Price of Gold Fundamental Daily Forecast – Uncertainty Over Timing of First Rate Hike Driving Prices Higher

Gold futures are trading higher on Tuesday as bullish traders continue to take advantage of the low holiday volume and a slightly weaker U.S. Dollar. The lack of movement in Treasury yields could also being lifting the previous metal.

Reuters is saying concerns over the spread of the Omicron coronavirus variant led bullion’s year-end rally to a more than one-month high, but they are also writing that easing concerns over the impact of Omicron is driving investors into higher risk assets.

At 13:39 GMT, February Comex gold futures are trading $1821.20, up $12.40 or +0.69%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $169.35, up $0.38 or +0.23%.

The Omicron story is confusing because we have to dig deeper than the usual “lower yields, weak dollar are providing support” headline. They probably are the factors driving the price action in gold, but it’s not that obvious.

Gold Adjusting to Lower Yields

According to the March 10-Year U.S. Treasury note futures chart, yields hit a short-term top on November 24 and moved lower into December 20.

February Comex gold futures made a bottom on December 2 at $1762.20 and again at $1753.00 on December 15.

Comparing the two charts shows that the markets were out of sync and not moving in the usual lockstep pattern with gold falling with each uptick in yields and vice-versa. In other words, gold’s correlation with yields became disjointed.

Gold prices fell more than they were supposed to and now traders are making adjustments to line up the two markets once again.

Fed Expectations Influencing Gold Prices

Gold prices began to plunge in mid-November as traders priced in a faster Fed tapering of stimulus and at least two Fed rate hikes. Gold hit a bottom when the Fed announced a quicker tapering and as many as three rate hikes in 2022.

However, as gold was going down, yields were also falling. This is where their typical correlation fell apart. Now gold is moving higher, while yields are trading lower than where they were when the Fed issued its hawkish monetary policy statement.

So what we are essentially looking at is a price adjustment in the gold market designed to get its correlation with Treasury yields back in sync.

Furthermore, yields actually fell after the Fed announced as many as three rate hikes because they didn’t specify when they would impose the first nor did they announce the timing of the other rate hikes.

All the Fed really said was they were aiming to end tapering by the end of March. Gold traders have seized upon the lack of clarity from the Fed and are driving prices up to account for the uncertainty over when the Fed will actually raise rates in 2022.

Additionally, the Omicron breakout may be supporting the notion that the Fed will delay its first rate hike to account for potential damage to the economy from this current wave of cases.