James Hyerczyk
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Gold futures tumbled last week as a stronger U.S. Dollar and elevated U.S. Treasury yields hammered the non-yielding bullion’s appeal. The market also posted its worst monthly performance since November 2016.

The key factor driving the price action was U.S. 10-year Treasury yields which held near their highest level in over a year. US. Treasury yields have risen more than 50 basis points so far this year, eroding gold’s status as an inflation hedge since that translates into higher opportunity costs to hold bullion.

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Last week, April Comex gold futures settled at $1728.80, down $48.60 or -2.73%.

The surge in yields last week started after Federal Reserve Chair Jerome Powell failed to convince investors that the central bank would hold policy unchanged for the next several years and that inflation would be contained despite showing signs of heating up.

Powell Says Economy Still Needs Fed Support, Pushes Bank on Inflation Worries

Federal Reserve Chair Jerome Powell, pushing back on suggestions that loose monetary policy risked unleashing inflation and financial risks in what may be an emerging economic boom, said the central bank would keep its attention focused on getting Americans back to work as a vaccine-related recovery proceeds.

“Monetary policy is accommodative and it continues to need to be accommodative…Expect us to move carefully, patiently, and with a lot of advance warning,” before any changes, Powell said in response to questions from Republican lawmakers about whether a faster-than-expected recovery still required crisis-level assistance.

Powell, who was testifying before the U.S. Senate Banking Committee, acknowledged the potentially fast growth to come as the coronavirus crisis eases and vaccinations expand. Coming updates to the Fed’s outlook may show the economy expanding “in the range’ of 6% this year, he said, and overall output conceivably returning in the next few weeks to the pre-pandemic level.

Such a rebound would have been unthinkable even a few weeks ago, but the rollout of COVID-19 vaccines coupled with federal fiscal support that has bolstered household income has boosted the economic outlook for the year, according to Reuters.

When asked what his message was to financial markets, Powell did not talk about the risks of rising bond yields or a possible spike in inflation, but of the roughly 10 million jobs still missing compared to a year ago, and the need for the U.S. central bank’s policy to stay wide open until that is fixed.

Interest rates will remain low and the Fed’s $120 billion in monthly bond purchases will continue “at least at the current pace until we make substantial further progress towards our goals…which we have not really been making,” Powell said in the hearing, his first since Democrats won the White House and control of both chambers of Congress.


Weekly Outlook

Powell may not be concerned about rising Treasury yields and inflation, but he is worried about the jobs market. This week, we expect Fed officials to try to talk down the rise in yields, but the biggest impact to the gold market could come from Friday’s Non-Farm Payrolls report.

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

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