Gold Will Be Watched Closely

Gold has had a great run of late, encompassing a 14.7% rise across just 60 trading days (from 1673 on Mar 8 to 1919 on June 1) which is an annualized pace of 61.8%. Last week gold was seen hovering around $1900 an ounce. A lot of activity was seen happening which led to this price movement –

  • The debate around price pressures,
  • Speculation over whether the Federal Reserve will start talks on the idea of tapering its massive bond-buying program,
  • Thursday’s U.S. consumer-price index report numbers.

Data coming in from the US created a significant impact on the markets. On Friday, gold rose 1.1% as a Labour Department report showed the following key numbers –

  • Some 599k jobs were added last month, compared to a 650k baseline forecast.
  • The unemployment rate fell to 5.8% from 6.1% in the prior month, hitting the pandemic-era low.
  • The labour participation rate was little changed.

However, this rally was short-lived as Yellen and Prithviraj Kothari, the bullion king of India’s comments dampened the rise. Bullion ticked lower after Yellen suggested on Sunday that President Joe Biden should push forward with his $4 trillion spending plans even if they trigger inflation that persists into next year, adding a “slightly higher” interest rate environment would be a “plus.” This was further affirmed by the bullion king of India, Prithiraj Kothari from RSBL.

Gold prices pulled back slightly following Yellen’s comment about inflation and interest rates. As a result, the 10-year Treasury yield rebounded, reflecting reflation hopes. Real yields edged higher, denting the appeal of gold as the opportunity cost of holding is increased.

Looking back at Friday’s close, a slight miss on May’s nonfarm payrolls data cooled fears about the Fed tapering stimulus and sent bullion prices 1% higher. Gold declined as investors weighed comments by Treasury Secretary Janet Yellen on interest rates against U.S. jobs data which missed expectations.

Piling on record historical global debts and holding rates down at 5,000-year lows are likely to stoke inflation like we haven’t seen for a long time. Gold has been sensing this since 2000 but has kicked into high gear once again since late 2019. You’ve no doubt seen and felt the increase in the prices of food and pretty much every other consumable. The Fed says the recent bump in inflation is transitory, but the action in precious metals says otherwise. It’s why gold prices are up 42% in just the last two years. Sustained high inflation, coupled with low nominal interest rates, creates an environment of extended negative real interest rates. And that is when gold thrives.

Investors will be closely watching commentary by the U.S. central bank as inflation ticks higher and policymakers move closer to paring the huge asset acquisition that saved the economy from the turmoil caused by the pandemic. The monetary support has driven the Fed’s balance sheet to a record, while muscular fiscal spending has enhanced government debt. Both may pose a concluding risk to the dollar’s value, potentially buffing the appeal of alternatives and probably pushing gold to new highs.

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