More gold bears waking from hibernation
(Kitco News) - Spring must be around the corner because gold bears are coming out of hibernation. It has been another difficult week for the precious metal as the price has been unable to hold the line at $1,750 an ounce.
The lackluster price action is having an impact on sentiment in the marketplace as more banks start to lower their bullish forecasts for the year. Precious metals analysts at Commerzbank started the week saying that they see gold prices pushing to only $2,000 an ounce this year, down from their initial target of $2,300 an ounce.
Thursday, Goldman Sachs followed suit as they also downgraded their gold forecast to $2,000 from their previous 12-month target at $2,300.
For both banks, the biggest hurdle for gold remains the significant selloff in bonds, which is driving bond yields higher. The yield on the 10-year notes continues to rocket higher, pushing above 1.6%, hitting a new one-year high. While yields are still relatively low, they are sharply higher compared to 0.5% seen just six months ago.
The looming question in the marketplace is how high the Federal Reserve can allow bond yields to go? Unfortunately, investors didn't get any real answers from Federal Reserve Chair Jerome Powell, who spent two days testifying before Congress. Powell was fairly elusive when it came to providing specific answers to politicians.
Talking about bond yields, Powell simply noted that the market was pricing in a more robust and complete economic recovery because of government and central bank stimulus measures supporting the economy. Instead of talking about any specific action, he reiterated that the central bank would maintain its ultra-accommodative monetary policies "for some time."
Not only did Powell show little concern for rising bond yields, but he also remained fairly complacent on inflation. With everyone focused on renewed economic activity in the U.S., they are disregarding the growing threat of inflation.
However, more and more investors are raising their own concerns. Michael Burry — the investor who was profiled in Michael Lewis' "The Big Short" book about the mortgage crisis and who now runs Scion Asset Management, sent a warning about inflation on Twitter.
"The U.S. government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket," Burry tweeted on Saturday, ahead of Powell's testimony.
But it's not all bad news for the gold market. Although the yellow metal has been struggling to find new bullish momentum, some analysts note that the recent price action is a sign of resilient strength. Bond yields are at a one-year high, yet gold manages to hold support at its June lows.
"The reason why we don't see a stampede out of gold is because some people think maybe the bond selloff is overdone, or maybe inflation is going to be more than anticipated," said Axel Merk, president and chief investment officer of Merk Investments.
As to how high bond yields can go, Merk said that he thinks the selloff is a little overdone but momentum in the marketplace could push yields to 2%.
So gold investors can expect to see some turbulent waters in the near-term; however, I would like to point out one last thing. Even as banks start to lower their lofty gold price targets, they still remain bullish on the precious metal in the long-term.
The reality is that central banks and governments worldwide continue to pump massive liquidity into financial markets. We have no idea how this is going to impact long-term inflation pressures.