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Is yield-curve control around the corner as gold price faces 'a tsunami of bad news'?

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(Kitco News) - Gold investors should expect to feel a bit more pain as bond yields have room to move higher before the Federal Reserve is forced to step with a yield-curve control program, according to some analysts.

The gold market has seen some significant selling pressure in the last few days, coinciding with rising bond yields. Tuesday, 10-year bond yields rose to 1.33%, their highest level since financial markets were first roiled by the COVID-19 pandemic nearly a year ago.

According to economists and market analyst, growing expectations for a stronger-than-expected economic recovery is having a bigger impact on yields than the threat of rising inflation. The bond market has seen nominal yields rise faster than the breakeven rate. This environment is causing real yields to rise, which is weighing on gold, a non-yielding asset.

The growth argument received a big boost Wednesday after the U.S. Commerce Department said that retail sales in January jumped a massive 5.3%. Michael Pearce, senior U.S. economist at Capital Economics, said that the U.S. economy is being "supercharged" by government stimulus measures.

While rising bond yields are negative for gold, market analysts note that they are also bad for equity markets. The question many investors are now asking is how high yields can go before the Federal Reserve steps in.

Ole Hansen, head of commodity strategy at Saxo Bank, said that a central bank yield-curve control program would be a game-changer for the gold market and could be the spark needed to ignite another rally to $2,000 an ounce.

Unfortunately, he added that yields have room to move higher before the Fed steps in. He said he would expect the central bank to look at tapping down yields if they rose above 1.5%.

"In the short term, gold faces a tsunami of bad news, rising bond yields, a stronger U.S. dollar, and record equity markets," he said. "However, the higher bond yields rise, the bigger risk they pose for financial markets. Rising yields are poison for equity markets, so at some point, the Fed will have to step in."

Afshin Nabavi, head of trading with MKS (Switzerland) SA, said that although the gold market is struggling as bond yields rise, long-term fundamentals remain in place.

Nabavi said that expectations for economic growth are picking up; however, he added that the COVID-19 pandemic had created a lot of damage, and it will take years for economies to normalize.

"The gold rally is far from over," he said. "But it does need to take a breather from time to time. The pandemic has created a lot of suffering, and it will take a lot more stimulus before the global economy is back to normal and that will continue to support gold prices."

Commodity analysts at TD Securities are also watching the Federal Reserve balancing act closely; however, they expect the central bank to eventually push back on rising rates as they threaten sky-high equity valuations.

"We suspect pressure will build at the Fed to push back against taper talk, but in the meantime, the rise in real yields has lowered the bar for gold prices to break below their months-long support," the analysts said.

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