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  • XAU/USD has flatlined in the mid-$1880s in recent trade as market quieten down pre-Asia.
  • Gold prices were supported by growing expectations for more Fed action, lower real yields and higher inflation expectations on Thursday.  

Spot gold (XAU/USD) prices have flatlined in the $1880s in recent trade, as markets consolidate in quiet pre-Asia Pacific trade following a day of impressive gains that has seen the precious metal climb more than $20 or 1.1%

Deteriorating US labour market, Fed, inflation expectations, real yields

A few key fundamental factors boosted gold’s value on Thursday. Firstly, the market’s reaction to Fed Chair Jermone Powell’s dovish post-FOMC rate decision press conference did not all happen in one go. Indeed, gold prices rallied throughout the Asia session and then took a leg higher as European participants entered the fray and had time to digest Wednesday’s Federal Reserve event. This delayed reaction saw the precious metal rally to at least the $1880 mark.

XAU/USD prices saw a leg higher in the immediate aftermath of a much higher than expected US weekly initial jobless claims number (which came in at 885K versus expectations for a reading of 850K). The data showed that the pace of economic deterioration, with regards to the US labour market anyway, has accelerated significantly over the past few weeks as Covid-19 has become more prevalent and economic restrictions have been re-imposed.

XAU/USD jumped to highs in the $1890s, but not as a result of gold’s status as a safe haven asset (indeed, risk assets such as US equities remained well supported in the aftermath of the data), rather as a result of how markets interpreted the data as making further monetary policy easing from the Fed in January more likely. That was evidenced by how bond yields dropped (on expectations of more Fed QE) and inflation expectations spiked from 1.91% to over 1.93% on expectations that any downward pressure that near-term Covid-19 fuelled economic weakness has on inflation will be more than offset by the inflationary pressures created by further Fed monetary easing in the long-run.

Looking ahead, US real interest rates are likely to remain under pressure given 1) the Fed wants to keep US borrowing costs at rock bottom so that the government can afford its huge deficit and 2) bullish vaccine news and further fiscal stimulus are likely to continue to boost inflation expectations (which push real yields lower). Low (or negative in the case of the US) real interest rates keep gold supported, as investors prefer to hold an asset that yields nothing over an asset that they have to pay to hold.