Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
What next for gold after hefty reaction to FOMC meeting
Ole Hansen
Head of Commodity Strategy
Summary: Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Being the most interest rate and dollar sensitive commodity the yellow metal suffered as the dollar and US real yields both reached two-month highs. Looking ahead continued dollar strength will pose a challenge while gold should be able to withstand rising yields as long it is driven by rising inflation expectations.
Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Markets were surprised at the scale of the adjustment to the Fed policy forecasts and treasury yields backed up steeply, spooking risk sentiment and taking equities lower, gold sharply lower and sending the USD spiking sharply to the upside.
The headline in today’s podcast says it all: “Time to smell the coffee: The Fed tightening cycle has begun” Although the dot plot is not signaling any rate hikes before 2023, the fact the Fed suddenly signaled willingness to consider tightening was something the non-yielding investment metals struggled to deal with and as a result gold, already on the defensive after getting rejected above $1900, broke down through several key technical support levels.
Gold remains the most interest rate and dollar sensitive commodity, and while the dollar reached a two-month high, it was the movements in Treasury yields that spooked the market. While acknowledging inflation is rising the Fed only lifted their 2022 and 2023 projections by 0.1% to 2.1% and 2.2% respectively. The firm belief inflation will be transitory helped drive a 10 basis point reduction in 10-year breakeven yields. With nominal yields at the same time rising by 10 basis points, most of the damage was seen in real yields which jumped 20 basis points to -0.75%.
While dollar strength will pose a challenge, gold should be able to withstand rising yields as long it is driven by rising inflation expectations. That was, however, not what we saw yesterday, so once again the million dollar question is whether inflation will be a passing phenomenon or longer lasting. For now the market trusts the judgement of the Federal Reserve and until data potentially proves them wrong, gold and with that also silver may face another challenging period.
Gold which wasn’t trading robustly in the days leading up to yesterday’s FOMC meeting took a tumble from the simultaneous moves in dollar and yields. The break below the 200-day moving average at $1838 opened the floodgates with $1825 offering no support before seeing two-way activity close to the next key level just below $1800. With RSI’s getting close to oversold, thereby signaling most of the capitulation selling is done, the $1798 to $1770 range is an area that needs to hold and attract fresh buying in order to avoid a return to the March double bottom. Resistance at $1825, today’s high followed by the mentioned 200-day moving average level at $1838.
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