Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Yield rise tames post-FOMC bid in gold
Ole Hansen
Head of Commodity Strategy
Summary: Gold received an initial boost after the FOMC doubled down on its dovish stance, while signaling it will accept both the economy and inflation to run wild, with the latter being allowed to rise and run above 2% for a prolonged period of time. While the rising inflation outlook helped weaken the dollar, yields continued higher, thereby forcing gold lower to keep it stuck in no-mans land.
Gold received an initial boost after the FOMC doubled, or even tripled down on its dovish stance by maintaining an outlook for unchanged rates until 2024. The Fed effectively flashed a very accommodative green light for risky assets and dollar bears, versus the follow-on nervousness due to the ongoing question of whether the Fed is making a “policy mistake” in seeing the rise in longer US yields as entirely benign.
The quick conclusion on the meeting is that the Fed will accept both the economy and inflation to run wild, with the latter being allowed to rise and run above 2% for a prolonged period of time. The bond market took Powell’s comments as an invitation to continue to force yields higher with 30-year yields briefly touching 2.5% earlier today.
As mentioned, the initial support to gold and precious metals in general was primarily provided by a weaker dollar, especially against the euro where €1.20 has become a key upside level to watch as a gauge for where the dollar will be heading next. A break would support for gold, the most interest and dollar sensitive of all commodities. In the short-term however, the outlook looks neutral with the risk of a continued rise in US yields offsetting the positive impact of a weaker dollar and rising inflation concerns.
For now, gold remains stuck in no man’s land and despite having seen an improvement in the technical outlook it remains unloved by investors. Total holdings in bullion-back Exchange-traded funds has slumped to a nine-month low at 3,148 tons, a 9% reduction from last years peak. Hedge funds meanwhile have cut their net long in COMEX gold futures to a near two year low at 42k lots (4.2 million ounces), an 85% reduction from the recent peak from February 2020.
US 10-year real yields which remains a key driver for gold has risen back above -0.60% a level which on its last visit in early March saw gold trade 50 dollars lower to challenge key support below $1680/oz. The fact that it is holding well above that level could potentially be the first sign that the gold focus has started to diversify.
For now, however the chart and price action is telling us to remain neutral with a break above $1765 needed in order to attract renewed technical and momentum buying.
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