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Gold just can't shake the Fed

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(Kitco News) - The gold market just can't shake the fact that the U.S. central bank is looking to raise interest rates sooner than expected, even if the first rate hikes aren't for another two years.

This week we saw U.S. bond yields drop to their lowest point since mid-February, which should be bullish for gold, but the precious metal has not been able to lift its head much above the $1,800 level. If that isn't disappointing enough for gold bulls, the market was dealt another monetary policy blow as there is now a growing divide between the Federal Reserve and the European Central Bank.

This week the ECB said that it wouldn't raise interest rates until inflation is sustainably at its 2% target. The ECB said that it will respond "forcefully and persistently" to achieve its inflation target. Those are some powerful words that mean that interest rates in Europe will remain low for longer.

The ECB is turning more dovish while the Federal Reserve looks to be more hawkish as the committee continues to talk about tapering its monthly bond-purchase program. This growing monetary policy gap is creating fuel for the U.S. dollar, generating a significant headwind for gold.

While there is a strong bearish case for gold in the near term, as investors adjust to shifting monetary policies, it is still difficult to ignore the fundamental factors that continue to support the precious metals.

Although the Fed is expecting to taper its monthly bond purchases by the end of the year, they are going to move at a snail's pace. Currently, the central bank is buying $120 billion in bonds. During the worst of the 2008 financial crisis, they were buying $85 billion. So a reduction in purchase means that the Fed will just be going back to where it was less than a decade ago.

In a recent commentary, Joe Foster, a precious metals portfolio manager at VanEck, argued that with the rising inflation threat, a rate hike in 2023 might be too little too late for the Fed.

In an interview with Kitco News' Anna Golubova, former managing director at JPMorgan and now-CEO of Trovio Jon Deane, said that gold will be a critical safe-haven asset as we move through these "untested waters."

He added that growing corporate and personal debt has created a very precarious situation for the Federal Reserve.

"If the Fed starts raising rates in this environment, the impact on the economy will be quite significant. It's a real fine line that they have to walk whereby raising rates doesn't dramatically cause a huge U-turn in the economic stability that they've been able to create," he said.

Central Banks are also jumping back into the gold market with the Banco Central do Brazil buying 41.8 tonnes of gold last month. According to the reports, Brazil's central bank has increased its gold reserves by more than 50% in the last few months. The precious metal now represents 1.9% of its total foreign reserves, up from 1.2%.

That is it for this week, have a great weekend.

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.