Lately we have seen both gold and silver under bearish pressure. On one hand we saw gold reaching its lifetime high of $2075 in 2020, we even saw the yellow metal crashing to as low as $200 in the first quarter of 2021.
Market analysts, technicians, and Prithviraj Kothari the bullion king of India have been consumed as they analyse the multiple factors that had created bearish pressure on both gold and silver pricing. Of all these factors, there are two connected factors that seem to have the greatest impact on creating negative market sentiment towards gold and silver.
They are –
- Dollar strength
- U.S government bonds and yields.
A strengthening dollar is a direct result of rising yields and hence both remain interconnected, according to the bullion king of India.
There are signs that gold has found a bottom after a streak of weekly losses, according to analysts. Now, the focus is shifting to the Federal Reserve’s rate announcement on Wednesday. All eyes remained glued to the U.S. Federal Reserve meeting, due to start later on Tuesday.
U.S. Treasury Secretary Janet Yellen said Sunday the U.S. inflation risk is small and manageable. The Federal Reserve’s two-day Open Market Committee (FOMC) meeting begins Tuesday morning and ends Wednesday afternoon with a statement and new U.S. economic projections. While no change in U.S. monetary policy is expected at this week’s meeting, traders will be closely scrutinizing wording on the Fed’s economic growth and inflation prospects.
Analysts and bullion kings are not expecting any significant policy changes as markets are starting to wonder if the U.S. could see sooner-than-expected rate hikes due to strong economic growth and rising yields.
Investors and traders are generally more focused on better global economic growth prospects and the pandemic being tamped down by rising vaccination levels, and less focused on rising government bond yields that have at times recently produced speed bumps for the stock market bulls. The benchmark 10-year U.S. Treasury note yield is presently fetching 1.613%.
Currently we see yield rising over the following reasons-
- Massive stimulus
- Fast vaccination rollouts
- Low-interest rates
Inflation expectations have soared over the past three months, with five-year breakeven rates rising to 2.6%, the highest since 2008. U.S. 10-year Treasury yields are now trading above 1.6% and some market participants are expecting the benchmark could reach 2% before year-end.
Gold has lost $200 so far this year. But now analysts believe that the selling is probably done off and Wednesday’s Fed announcement will be a key driver for the precious metals sector this week.
In such uncertain environment it’s quite natural for investors to find ways to protect themselves against inflation. But they are also very well aware that the central bank may raise interest rates to keep inflation under control.
While gold looks like an attractive hedge against rising prices, this isn’t the case when interest rates are going up too. However, it’s the real interest rates that matter — that is, the interest rates adjusted for inflation. In other words, when inflation kicks in but central banks hold off from raising rates in response. When investors see this happening, gold will then become an attractive investment proposition.