29 June 2021

The Fed’s Balancing Act Should Push Gold Back Up

Gold prices traded sideways the past week, as markets await economic data releases starting on Friday. Gold has consolidated the past 5 days above the $1,770/oz mark, and the dollar inched up – the Dollar Index increased 0,49% from its five-day low. As a result, Treasury yields decreased 3.68% from its five-day high of 1.544% to 1.487%.   

Treasury yields have been the main driver for gold price movements the past year, as it represents the cost foregone (in interest) if you’re owning gold, instead of U.S government bonds. Declining Treasury yields, therefore, decreases the opportunity cost of holding gold – a favorable environment for the safe-haven.   

Investors are anxiously awaiting the U.S jobs report as the second quarter of 2021 comes to an end. A weak jobs report will be favorable for gold prices as it will indicate that the labor market is constrained by higher inflation. Gold pundit James Rickards stated that “The unemployment rate is declining, but real unemployment is not. We still have 7.6 million fewer jobs than before the pandemic.”  

With real inflation moving higher, the U.S Fed cannot afford to start tightening asset purchases. It will cause a decline in economic growth and asset prices before the labour market can recover. This tight balancing act should help support gold to return to its previous levels after it dropped to oversold territory on recent Fed meeting talks of tightening.   
The yellow metal was last seen trading at $1,774/oz.

Jaco Lups