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Not a quiet summer: Gold price to take direction from U.S. data, Fed speak, USD, and yields - MKS PAMP GROUP

Kitco News

(Kitco News) After seeing the worst weekly performance in 15 months, some of the worst gold outflows could be behind the precious metals space, according to MKS PAMP GROUP head of metals strategy Nicky Shiels.

Gold lost around $100 last week as markets digested a surprisingly hawkish Federal Reserve announcement, which included higher inflation expectations and two new possible rate hikes as soon as 2023.

"Given the outsized and pivotal repricing across metals, global currencies and rates this week, following the hawkish Fed tilt, its worthwhile to outline our thinking and framework for a range of asset classes and precious metals, as we head into the summer," Shiels said in a report.

Most of gold's outflows are likely now done, but the precious metal will remain sensitive to any new macro data, especially employment and inflation, any new Fed speak, the U.S. dollar price performance, and the U.S. Treasury yields, Shiels said.

"Gold's floor remains nearby as gold-specific outflows are largely behind us. Remain vigilant/neutral as prices are now more sensitive to how U.S. data unfolds in the lead-up to Jackson Hole, Fed speak, and where real yields and the USD trend to," Shiels pointed out.

After the Fed's announcement last week, gold has started playing defense. There are now many obstacles putting pressure on the recovery, including prospects of higher U.S. dollar, better-than-expected data, higher real yields, commodity rollover, and shifting equity flows, she added.

"Strong U.S. data will likely now trigger price sell-offs vs. pushing the inflation trade. If rates remain pinned & low and lackluster data supports a put Fed, the continued convergence of risk-on and stimulus drives outperformance in other higher beta sectors (gold does well but doesn't outperform)," Shiels wrote.

However, playing in gold's favor is the fact that gold has already lost more than 7% since last week's peak, which means that the technical positioning is looking better.

"Gold is not nearly as overweight/heavy as previous price peaks and taper tantrum episodes (2011, 2013), and especially relative to the amount of liquidity/money sloshing around," Shiels noted. "In addition, there's $200bn invested in Gold (known ETF + COT length), which is only ~0.53% of equity portfolios (on AUM basis), or half to 1/3rd as much as levels seen in 2011 and 2013."

Other positive gold drivers include de-dollarization policies of many central banks around the world, which could put some pressure on the U.S. dollar, improving Asian gold demand, and growth recovery in Europe, Shiels said.

One thing to keep in mind with the Fed's tapering talk going forward is how the central bank's approach might change once further stimulus dries out or fails to pass.

"While the narrative now is that the Fed will commit to tapering soon, and won't be behind the inflation curve, that becomes a lot trickier down the line, if /when any further fiscal stimulus (i.e.: the infrastructure bill) doesn't pass. There is every incentive for Democrats (given conventional wisdom & history pointing to losses for newly elected presidents) to maintain 2021 economic outperformance into the midterms in 2022. On the flip side, any Fed taper in the face of a fiscal drawdown could trigger a similar taper tantrum in 2013," Shiels specified.

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