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When will the Fed rescue gold?

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(Kitco News) - It has not been a good week for the gold market as prices have fallen to an eight-week low. Many investors are now asking how much longer this can go on.

The selloff in gold coincides with a significant selloff in the U.S. bond market. This week, the U.S. 10-year bond yield rose above 1.3%, its highest level since the COVID-19 panic-induced selloff in March of last year. The rally came after the U.S. Commerce Department reported a 5.3% increase in retail sales in January.

Apparently, the government's stimulus plan is working, and the $600 given to Americans in December is helping to boost consumption growth, which is a significant driver for the economy. In this environment, investors are shedding safe-haven assets like gold and bonds. They are jumping into risk assets with both feet.

We have talked about the debate between growth and inflation, and it appears that the growth argument is gaining some traction, and some investors are exiting the gold market. This week TD Securities, a major gold bull, said that it was stopped out of its long positions as prices dropped below $1,790 an ounce. They warned that the market could see further liquidation in the near-term as bond yields rise.

Even billionaire gold bull Jeffrey Gundlach, CEO of DoubleLine, appears to be cooling on gold. In a tweet Wednesday, he said that he has been neutral on gold for the last six months. Instead, he is watching bitcoin.

"Lots of liquid poured into a funnel creates a torrent. Bitcoin maybe The Stimulus Asset. Doesn't look like gold is," he said in the tweet.

So positive sentiment among gold investors is starting to sour; however, some analysts are warning that although gold prices have room to go lower, there are still significant long-term fundamentals in play and the rally back to record highs is far from over.

The reality is that bond yields can only rise so far before they start to weigh on economic growth and pose a significant risk to overvalued equity markets. With so much debt surging through financial markets, the Federal Reserve can't afford to keep interest rates high for an extended period of time.

If the current environment doesn't change, the U.S. central bank will eventually be forced to cap bond yields with a yield curve control program.

In a recent interview with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that yield curve control will be a "game-changer" for the gold market and could the spark that ignites a rally back to record highs above $2,000 an ounce.

Many analysts have said that once the Federal Reserve steps in to cap bond yields, the focus will once again shift to the rising inflation threat. This means that with bond yields unable to go higher, rising inflation will push real interest rates lower, and that is when gold shines the best.

So, for now, heading into the weekend, we play the waiting game.

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.