- Spot gold prices have unwound Wednesday’s post-FOMC gains to slip back into the low $1720s.
- Surging US yields have driven the drop, as markets bet on a strong US economy and higher inflation.
The boost that spot gold (XAU/USD) prices derived in wake of Wednesday’s more dovish than anticipated FOMC monetary policy decision, which saw prices surge as high as the $1750 mark during Asia Pacific trade on Thursday, has now more than unwound. Spot prices have been on the back foot since the arrival of European traders in the market from around 06:00GMT on Thursday morning dropping back from the $1750s all the way to current levels in the low $1720s as US trade gets underway. At present, gold prices are down about 1.4% or over $20 on the day and are now trading at fresh lows on the week.
Driving the day
Dovish Fed vibes were behind Wednesday’s rally in gold prices; as a reminder, the Fed held its policy-setting steady and maintained it dovish policy guidance as expected in Wednesday’s rate decision. Its new economic forecasts were much more optimistic, reflecting expectations for the positive boost to US economic growth as a result of fiscal stimulus. Most important from the market’s perspective was the updated dot-plots, which continued to show rates staying at the zero lower bound through 2023 – some market participants had expected the dots to imply at least one hike in 2023, hence the dovish reaction that saw gold prices surge.
However, the Fed’s dovish dot-plot failed to stem the recent rise in US government bond yields and, on the contrary, seems to be feeding into higher yields on Thursday, which are seeing their largest surge so far this month. 10-year yields, which were trading closer to 1.65% overnight, have rocketed all the way to not far from 1.75%, a near 10bps surge on the day. That has pushed the 2s10s spread (the difference between the US 10-year and 2-year yields – a proxy of yield curve steepness) to close to 160bps, its highest levels since 2015. This is weighing heavily not just on gold and silver, but also on durations sensitive stocks (like Big Tech) and is giving the US dollar a boost.
Why are yields rising?
In terms of why bond yields are surging this morning, the move is likely being driven by shifting narratives around the outlook for the US economy, US inflation and Fed policy as trader chew the fat on yesterday’s FOMC meeting – the US economy is expected to see a roaring recovery over the next three years (a view with which the Fed agrees, just see their new super bullish economic forecasts) and inflation is expected to pick up strongly. But despite the above, the Fed is signalling that it is going to stay super dovish, given its new emphasis on reaching full employment and average inflation targeting policy.
It seems as though markets face two scenarios; 1) the US economy running hot but within the Fed’s expectations, so they maintain very easy monetary policy, leading in turn to higher inflation, which itself lifts bond yields (via higher inflation expectations) or 2) the US economy running hot and perhaps pushing inflation higher than the Fed expected, leading to the Fed panicking and tightening monetary policy earlier than market’s currently price, which in turn lifts bond yields via a rise in real yields as a result of the Fed tightening financing conditions. In either scenario, the path for yields is higher.
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