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Gary S.Wagner
Federal reserve building

Immediately following the conclusion of the FOMC meeting yesterday, we saw gold stage a strong rally moving from roughly unchanged to close higher by double digits. Many analysts interpreted the gains as a direct result of the Federal Reserve statement, which included the most current “dot plot,” indicating that interest rates most likely will stay where they are through 2023.

However, in trading overseas, gold continued to climb higher as it opened in Australia on Thursday morning but then began selling under pressure as it moved into Hong Kong and London. The primary events that caused gold prices to weaken were dollar strength and higher yields in U.S, Treasury notes. In fact, the 10-year Treasury yield gained in excess of nine basis points, moving the current return to 1.73%. An absolute negative factor for gold placing bearish pressure on the metal.

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This signals that even with the definitive tone of Chairman Powell once again conveying the Federal Reserve’s intent to keep interest rates where they are for a long time. While market participants looking at good economic data nonetheless continued to bid yields higher in anticipation of a rate hike disregarding the dot plot produced by the Federal Reserve as well as Jerome Powell statements during the press conference yesterday.

However, by the close of trading in New York gold basis, the most active April 2021 Comex contract gained significant ground. And although it closed well off of its high, which was $1754, it did gain $7.50, or 0.43%, and is currently fixed at $1734.60. Concurrently the uptick in gold occurred with extreme dollar strength, which was also up approximately .045%. That means if the dollar had been neutral today, we would have seen a gold rise by approximately $15.

Another interesting aspect was the negative correlation in terms of price change between spot or Forex gold and gold futures. Although spot gold is still slightly above the price of April’s futures contract, the net change on the day was a decline of nine dollars in spot compared to a positive gain of $7.50 in gold futures. According to the KGX (Kitco Gold Index), today’s decline of $9.00 is a combination of dollar strength and selling pressure. The vast majority of today’s change occurred because of dollar strength which accounted for $7.85 of the decline, with the remaining $1.15 resulting in spot gold at $1736.50.

At least for today, gold futures were able to overcome both dollar strength and higher yields on U.S. treasuries which rose to a 14-month high. Many analysts believe that unless the Fed intervenes to address the differential between short-term and long-term bonds and notes that the yield in the 10-year note could trade as high as 2%. That is only 0.02% off of the pre-pandemic yield, which was at 2.2%.

There is no doubt that analysts, market participants as well as traders are still gleaming through the statement released yesterday and working through the statements made by Chairman Powell, not only focusing on the words but the demeanor. Although he has been emphatic about keeping interest rates near zero for at least two years, it seems market sentiment does not agree with that assessment. There are those analysts that believe that if solid economic data continues to be forthcoming, it will force the hand of the Fed to raise rates sooner than they had anticipated.

This is contrary to the statements and determination of the Federal Reserve to not make the same mistakes that didn’t 2008 by raising rates too quickly. In the words of Chairman Powell, it will be the pandemic that dictates action by the Federal Reserve, and they will not act in a way that could hinder a full recovery in the fastest period of time.

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Wishing you, as always, good trading and good health,

Gary S. Wagner

 

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