Gold Talking Points
The price of gold pulls back from the weekly high ($1875) to largely track the recent weakness in longer-dated US Treasury yields, and the Federal Reserve’s first meeting for 2021 may do little to prop up the precious metal as the central bank relies on its non-standard tools to achieve its policy targets.
Fundamental Forecast for Gold: Bearish
The price of gold may continue to give back the rebound from the monthly low ($1803) as the Federal Open Market Committee (FOMC) remains “commitment to using its full range of tools to support the U.S. economy during this challenging time,” and it seems as though the central bank will continue to utilize its balance sheet “until substantial further progress has been made toward reaching the Committee’s maximum employment and price stability goals.”
The minutes from the December meeting suggests the FOMC is in no rush to scale its emergency measures as “all participants judged that it would be appropriate to continue those purchases at least at the current pace,” and it remains to be seen if the Fed will adjust the forward guidance in 2021 as “some participants noted that the Committee could consider future adjustments to its asset purchases—such as increasing the pace of securities purchases or weighting purchases of Treasury securities toward those that had longer remaining maturities—if such adjustments were deemed appropriate.”
In turn, key market themes may continue to sway financial markets as the Fed’s balance sheet climbs to a fresh record high of $7.415 trillion in the week of January 20 from $7.334 trillion the week prior, and it remains to be seen if the price of gold will continue to track US Treasury yields as the low interest rate environment along with the ballooning central bank balance sheets no longer provides a backstop for the precious metal.
With that said, the FOMC interest rate decision may do little to prop up the price of gold as long as the central bank stays on track to increase its “holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month,” and bullion may continue to give back the rebound from the monthly low ($1803) if the recent weakness in longer-dated US yields persists.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong