Gold News

Gold Price Drops Back to 2011 High as Fed 'Disappoints' on Yield Curve Control, Bargain-Hunters Expected

GOLD PRICES twice tested 1-week lows at $1925 per ounce in Asian and London trade Thursday, bottoming $90 below Tuesday's 1-week high as world stock markets also fell amid what analysts called "disappointment" with the US Federal Reserve's cautious tone on increasing monetary stimulus to fight the Covid pandemic's economic slump.
Defying market chatter about buying potentially unlimited quantities of Treasury bonds to keep the interest rate they offer near zero, yield curve control is not "warranted in the current environment" said minutes from the Fed's late-July meeting.
With the tech-stock Nasdaq index losing 0.5% on yesterday's news, global stock markets today lost 1.5% by the start of New York trading.
"It seems the market is quite displeased with the discussion about yield curve control specifically," Reuters quotes economist Tom Simons at US investment bank Jefferies.
Long-term interest rates still eased lower however on Thursday as government bond prices rose, cutting US Treasury yields to 0.26% per annum on 5-year debt and 0.64% on 10-year bonds.
But inflation expectations slipped faster, with 5- and 10-year US breakeven rates dropping to their lowest in over a week, down 3 basis points each from Tuesday's 7-month highs of 1.55% and 1.68% respectively.
Chart of inflation-adjusted US bond yields vs. Dollar gold price. Source: St.Louis Fed
The link between gold prices and inflation-adjusted US yields has rarely been stronger, with the 5-week correlation between 10-year real rates and gold now reaching -0.99, the most strongly negative relationship since the perfect inverse correlation of -1.00 seen a half-decade ago, when gold prices neared the bottom of a 4-year bear market.
Down from 7 August's new record gold price of $2075, today's low at $1925 per ounce is only just above the metal's prior all-time peak of September 2011.
"The gold price has cooled down a bit and client activity is on the lighter side," says one London bullion desk today
"[But while] another leg down is possible in the short-term, it would probably get bought by bargain hunters looking to make quick profits or new comers looking to save their purchasing power.
"The 'small' pullback towards $1870 in the middle of the month was quick to be filled, and I am of the view that another lighter pullback can happen before the gold price trades higher in September through November at least."
Major gold-backed ETFs were left virtually unchanged in size yesterday, with the SPDR Gold Trust (NYSEArca: GLD) needing 1,252 tonnes of backing – the most in 7 years – as cheaper competitor the iShares IAU needed a lifetime record above 502 tonnes to back its shares in issue.
On the geopolitical front meantime, "China is reluctant to hit back at US firms over Washington's new Huawei 'death sentence'," says the South China Morning Post, reporting that – while the US Commerce Department's new regulations of Monday could stop the Chinese tech-giant buying any US-made equipment – "Beijing still needs US technology and is keen to keep American businesses onside to help revive its economy."

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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