Gold hanging tough as bond vigilantes test the Fed's resolve
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As expected, Fed Chair Jerome Powell and his colleagues remained dovish at the end of the FOMC meeting on Wednesday, despite upgrading their U.S. economic outlook and mounting inflation worries in financial markets. Powell repeated a pledge to hold interest rates near zero until 2023 in an effort to keep the economic recovery on track, even if inflation breaches its 2% target this year.
During the virtual press conference which followed the meeting, gold began to surge towards resistance at $1760 when Powell stated that inflation could run as high as 2.5% this year.
But on Thursday, gold whipsawed and took back most of those gains as market focus returned to the Fed chairman also mentioning that current monetary policy is appropriate and there’s no reason to push back against the surge in Treasury yields.
Although the Fed allowing inflation to rise should support the gold price going forward, bond vigilantes testing the central bank’s resolve to let yields continue to rise is keeping pressure on gold, which offers no yield. After a modest consolidation, bond yields are spiking again to over 1.7% with not much resistance on the TNX until the 1.97% region.
While the Fed has yet to interfere with rising bond yields, the fact remains that they can only rise so far before beginning to weigh on economic growth and pose a significant risk to overvalued equity markets. When bond yields began to spike again yesterday, the technology-based Nasdaq came under heavy selling pressure.
With exponential debt surging through financial markets, the Fed cannot afford to let interest rates remain high for an extended period of time. If 10-year T-bond yields approach 2%, I expect the world’s largest central bank will be forced to cap bond yields by implementing a yield curve control (YCC) program. And as soon as the Fed begins YCC, its balance sheet is going to burst upwards once again, sending gold higher along with it.
The fact that bullion is $65 higher at 1.73% on the TNX than when the 10-year T-bond yield spiked to 1.6% last week, could potentially be the first sign that the gold focus has started to diversify. But in the short-term, the outlook for the safe-haven metal remains neutral with the risk of a continued rise in U.S. yields offsetting the positive impact of a weaker dollar and rising inflation concerns.
Meanwhile, gold stocks have been showing relative strength to the gold price as the metal has been bouncing from critical support at the $1670-$1690 region since early last week. The move higher has been led by bellwether Newmont Corp (NEM), the largest global gold miner, which has risen over 15% this month after raising its quarterly dividend by 38% in February.
Furthermore, after ending 2020 with US$5.5 billion of consolidated cash and US$8.5 billion of liquidity, Newmont announced it will acquire the remaining 85.1% of common shares of junior GT Gold not already owned by the company for a cash consideration of approximately US$311 million last week.
It is now cheaper for global miners that are holding large cash reserves to buy developing or developed projects on Bay Street via acquisition, rather than to develop projects themselves given shortages of capable development teams and timeline pressures.
With precious metals juniors trading at attractive valuations, global producers are beginning to concentrate on replacing depleting reserves. After the gold price has corrected 20% from its all-time high, this is a great time to consider accumulating a basket of junior developers controlling large projects being de-risked into the finance stage.
As senior gold producers face declining production profiles, shrinking reserves, and a return to rising production costs, I expect more news of miners targeting acquisitions to supplement their depleted pipelines.
Over the past 6 months, the Junior Miner Junky real money portfolio has sold two juniors for triple digit gains after each were acquired by a major gold miner. If you require assistance in choosing a basket of M&A candidates, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.