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Falling yields of the 10-year note support higher gold prices

Commentaries & Views

Today the minutes from last month’s FOMC meeting were released. They revealed that Federal Reserve members are now talking about the timeline to start reducing their asset purchases at a pace quicker than earlier anticipated. The net effect on U.S. debt instruments was a drop in the existing yields. Currently, the 10-year Treasury note is fixed at 1.315%, with the 30-year treasury at its lowest level since February at 1.936%. Declining yields increase the demand for the safe-haven asset gold as it lowers the cost of owning the precious yellow metal.

The Federal Reserve continues to look at current inflationary rates as transitory. At the same time, Federal Reserve participants, while believing that the current inflationary rate will dissipate over time, remarks were made that many members believe that the bottlenecks caused by supply-chain limitations and input shortages will continue to put major pressure on pricing into next year.

The minutes also revealed that Fed members believe that tapering their asset purchases which are currently set at $120 billion monthly, buying both mortgage-backed securities and federal debt instruments is a “matter of prudent planning.”

The current belief is that with the strength of the housing market, it is unnecessary to continue to allocate $40 billion each month to purchase mortgage-backed securities. This is one economic sector that is doing exceedingly well, showing substantial progress much sooner than anticipated.

As of 4:50 PM EST gold futures basis, the most active contract is currently trading up by $9.90 and fixed at $1804.10. This marks the fifth consecutive day in which the market closed above the prior close with a higher high and a higher low (with one exception) than the previous session. The last time gold traded above $1800 was on June 16.

Noteworthy is the fact that typically there is an inverse correlation between the U.S. dollar and gold. However recent action has proved to be the opposite. Both the dollar as well as gold have been moving to higher ground over this last week. The most recent rise in gold prices has occurred in conjunction with record levels in U.S. equities.

While the negative correlation is a common occurrence, there is an exception to that rule. When the Federal Reserve has an extremely accommodative monetary policy including extremely low-interest rates, coupled with quantitative easing, both equities and gold seem to move in tandem to higher pricing.

On a technical basis, there are multiple indicators that gold has once again become bullish in the eyes of market participants. The first of which is a golden cross which has recently been identified with the shorter-term 50-day moving average crossing above the longer-term 200-day moving average. The second technical indicator which strengthens the resolve of the bullish faction is that this most recent decline took gold prices to just below the 61.8% Fibonacci retracement and extremely acceptable price decline for a normal correction.

It seems as though market participants have come to terms with the fact that the Federal Reserve at some point will begin to taper their asset purchases and for the most part, has baked that into current pricing. The initial shock occurred immediately after the FOMC released its statement, and Chairman Jerome Powell addressed reporters during a press conference immediately following the statement’s release. Now that the shoe has dropped and market participants reacted to the inevitable reality that the Fed at some point will taper their asset purchases, the shock and awe are over.

Wishing you as always, good trading,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.