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Gold investors seeing through rising bond yields as Fed unlikely to be overly aggressive in 2022

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(Kitco News) - Gold investors appear to be calling the Federal Reserve's bluff that it will be able to get inflation under control as prices continue to hold above Wednesday's breakout move, according to analysts.

Not only are gold prices trading near a two-month high, but Wednesday's breakout came as U.S. bond yields pushed to their highest level in more than two years. The 10-year yield is currently trading at 1.83%, down slightly from Wednesday's rise to 1.87%. Real 10-year Treasury yields jumped more than 50 basis points since late last month and are hovering around -0.60%.

Meanwhile, spot gold prices last traded at $1,841 an ounce, relatively unchanged on the day.

Ole Hansen, head of commodity strategy at Saxo Bank, said that it appears that with a lot of bad news already factored in, the gold market is finally starting to react positively to rising inflation pressures, which is also pushing real yields and nominal yields higher.

Although rising consumer price pressures are leading to expectations for more aggressive monetary policy action from the Fed, analysts have said that there is only so much the Fed can do.

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"The problem when fighting inflation into a slowing economy is that there a growing risk of a policy error," said Hansen. "This is probably the reason why gold has been doing reasonably well."

Hansen added that he remains bullish on gold as the rally has also been reflected in other precious metals, particularly silver. Silver prices are up another 1.5% Thursday after rallying 3% the previous day. Spot silver prices last traded at $24.49 an ounce.

Although real yields have been moving higher, analysts have said they should remain in negative territory as inflation pressure builds. Economists have noted that rising commodity prices with oil prices trading near a seven-year high and increasing wages will continue to support inflation through 2022.

Michael Widmer, precious metals analyst at Bank of America, said that it is unlikely the Federal Reserve will be able to get inflation under control, which means that monetary policy will remain behind the inflation curve.

"Unless they really want to choke off the economy, it is going to be hard for the Federal Reserve to hike rates aggressively," he said.

Currently, markets are pricing in four rate hikes in 2022 with growing expectations of a 50 basis-point move in March. At the same time, the Fed is planning to stop its monthly bond purchase in March, and it could start to reduce its balance sheet before the end of the year.

Widmer said that it's unlikely the U.S. central bank will be this aggressive on monetary policy. He added that rates hikes will have little impact on inflation, which continues to be driven in part by global supply chain constraints.

Daniel Briesemann, precious metals analyst at Commerzbank, noted that gold is starting to attract new investor interest even in the face of rising bond yields.

He noted that gold-backed exchange-traded products saw their holdings increase by nine tonnes on Wednesday, the biggest one-day jump since mid-November.

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