Fed Will Continue To Dominate Bond Markets, Which Is Good For Gold – Degussa
(Kitco News) - During his second day of testimony to Congress, Federal Reserve Chair Jerome Powell said that the central bank is formalizing a plan that would stop the rundown of its balance sheet later this year.
Regarding the central bank's balance sheet, Powell said that they have worked out the "framework of a plan" that he hopes can be announced soon. The end of the runoff could end later this year.— Kitco NEWS (@KitcoNewsNOW) February 27, 2019
According to one European precious metals firm, the Federal vice grip of the bond market will continue to benefit the gold market.
Analysts at Degussa said the Federal Reserve will remain a significant buy-side player in the bond market, keeping bond yields low, which would also lower gold’s opportunity costs lows.
“The Fed’s latest announcement that it does not wish to withdraw from the bond market is by no means insignificant,” the Degussa analysts said in their commentary. “It is an unmistakable indication that the Fed is prepared to squeeze out what little is left of the free market forces in the debt market space, as its purpose is to keep the fiat U.S. dollar system going.”
While the Federal Reserve stop’s tightening monetary policy as global growth risks weigh on the U.S. economy, Degussa analysts said that the central bank is only delaying any downturn and the risk only rise as a result of artificially intervention.
“A continuation of artificially low interest rates, however, means more malinvestment. And the more malinvestment there is, the higher the costs of a correcting bust in term of output and employment losses will be,” the analysts said. “The outlook of low interest rates can be expected to result in a structural appreciation of the value of gold from the viewpoint of savers and investors – and this should push the price of gold higher going forward.”
The comments come as gold prices struggle to find new momentum as the U.S. dollar rallies following better than expected economic data. The advance reading of U.S. Gross Domestic Product showed that the U.S. economy grew 2.6% in the last three months of the year. Economists were expecting to see growth around 2.2%.April gold futures last traded near session lows at $1,315.60 an ounce, down 0.42% on the day.