The gold market continues to trade near session highs as Federal Reserve Chair Jerome Powell reiterated his stance that interest rates will have to be higher for longer, but he provided little new guidance on monetary policy heading into year-end.
Analysts have noted that the gold market has priced in a lot of bad news already, and the Federal Reserve, near the end of its tightening cycle, should not provide the same headwinds for the precious metal.
At an event hosted by the Economic Club of New York Thursday, Powell said that the Committee is committed to bringing inflation down to its 2% target; however, he also highlighted growing uncertainty in the global economy.
"A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little. Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy. Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully," Powell said in his prepared statement.
Analysts note that with gold prices trading at their highest level since early August, there is not much stopping the market from pushing back to $2,000 an ounce. December gold futures last traded at $1,989.40 an ounce, up 1% on the day.
"The gold bulls were relieved Fed Chairman Powell's remarks to the New York Economic Club today were not deemed as being more hawkish," said Jim Wyckoff, senior market analyst for Kitco.com.
Not only is gold pushing back to within striking distance of $2,000 an ounce, analysts note that its rally is even more impressive given where bond yields are. The yield on 10-year notes is trading at its highest level since July 2007, at 5%.
Analysts have noted that gold's highly negative correlation with bond yields has broken down as geopolitical uncertainty continues to rise as the world deals with two major conflicts. Along with Russia's war with Ukraine, many geopolitical analysts are waiting to see if Israel's war with Hamas will create further chaos and instability in the Middle East.
"Volatility in the region is mostly expected to remain elevated and that should keep gold's trajectory heading towards the $2000 level," said Edward Moya, senior market analyst at OANDA.
At the same time, Moya noted that gold is also benefiting as the rise in bond yields is creating some credit risks in the market.
"Right now, gold is the favorite trade on Wall Street, as it seems the bond market was ready to send the U.S. economy to a recession with 'higher for longer' becoming painfully high," he said.
During the question-and-answer period in Powell's presentation in New York, he downplayed the rise in bond yields.
He said that yields are being driven by term premiums. He added that markets are seeing resilience in the economy and are revising their views. He also pointed out that higher yields are taking some pressure off the Fed to raise interest rates.
He also said that it's unclear if the rise in bond yields will be persistent.
"We will let the market yield rise play out," he said.
Some analysts have said that gold could remain an attractive asset as fears around the U.S. debt continue to grow. This sentiment could turn even more investors away from the bond market, pushing yields higher. There is a concern building in the marketplace that the Federal Reserve could lose control of the yield curve, which would force them to start buying bonds and expand their balance sheet.
Source: Kitco NEWS
BDST: 1614 HRS, OCT 20, 2023
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