Gold under the spell of US monetary policy

Bars and Coins

The price of gold could soon hit the $ 1,900 an ounce mark again.

(Photo: obs)

Zürich The assumption of office by US President Joe Biden has so far not given the gold price the expected boost. As one of his first official acts, Biden announced a 1.9 trillion spending program and promised financial support in particular to poorer households. In response to the prospect of higher national debt, however, long-term yields on US government bonds have so far risen. Since gold does not generate any ongoing income, increasing returns put a strain on the price of the precious metal.

The yield on ten-year US Treasuries is over one percent and is trading at its highest level in six months. US government bonds with a 30-year maturity are trading at over 1.8 percent – as high as they were last at the end of February 2020. Financial market experts speak of a steeper US yield curve, with long-term yields rising faster than short-term yields.

The question is how long the US Federal Reserve can tolerate a further rise in yields in the face of rising national debt. This should also move the gold price in the coming months. This is underscored in a speech given by US Federal Reserve Chairman Jerome Powell a few days ago.

“It’s not yet the time to think about an exit,” said Powell, referring to the bond purchase program with which the Fed is pumping $ 120 billion a month into the markets. It has been interpreted as an indication that Powell is ready to use word and deed to stop US yields from rising further. US yields fell slightly after the speech, while the price of gold rose slightly.

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In the extreme, the Fed could go a step further and launch an unlimited bond purchase program to keep long-term yields within a set range. This form of interest rate curve control would probably be a driver for the gold price if Biden’s fiscal policy and economic growth after the corona pandemic were both fueling inflation.

No end of the loose monetary policy in sight

This is what Carsten Fritsch, commodities expert at Commerzbank, also expects: “With the signs of massive economic aid in the USA, the inflation risks are likely to increase.” An end to the loose monetary policy is not in sight. “The result would be even more negative real interest rates,” says Fritsch – this in turn makes gold appear more attractive in the eyes of investors.

Carlo Alberto de Casa, chief analyst of the broker ActivTrades, also expects that the gold price could soon return to the level of 1900 dollars per troy ounce (around 31.1 grams): “The momentum for a recovery in the gold price has returned, since the investors are relying on further monetary policy impulses from the central banks. ”From a technical point of view, only a drop to 1830 dollars would be an indication of a pronounced weakness in the gold price.

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Megan Shippman, an analyst at the investment bank RBC Capital Markets, believes that the gold price has barely moved so far this year as a snapshot. The statements by Fed Chairman Powell, but also the hearing in the US Senate of Janet Yellen, Treasury Secretary-designate in the Biden cabinet, should reinforce the upward trend in gold.

Yellen led the Fed before Powell. Like no other person, her appointment as finance minister represents the intertwining of monetary and fiscal policy. The cooperation should keep US yields in check – and for the precious metal, analyst Shippman expects: “It’s not over yet for gold.”

More: Gold could top its record high in the new year.

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