Breaking News
Black Friday SALE: Up to 54% off InvestingPro! Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Commodities: Gold Corrects Again As The Fed Makes A Not So Subtle Shift

By Andy HechtCommoditiesJul 02, 2021 17:30
au.investing.com/analysis/commodities-gold-corrects-again-as-the-fed-makes-a-not-so-subtle-shift-200475185
Commodities: Gold Corrects Again As The Fed Makes A Not So Subtle Shift
By Andy Hecht   |  Jul 02, 2021 17:30
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com

  • Gold failed at the $1900 level
  • The Fed tightened monetary policy without tightening monetary policy on June 16
  • The prospects for higher rates weigh on gold
  • A shift from "transitory" to “temporary” does not change the trend
  • Basel III could support gold - Buying on weakness has been the optimal approach for over two decades

Last year at this time, gold closed the second quarter of 2020 at $1798.10 per ounce. In Q3 2020, the price rose to a record high at $2080. The first half of 2021 ended on Wednesday, June 30, and the yellow metal was just above $1770 per ounce, not far below the year-on-year level. Gold’s price moved higher on a quarter-by-quarter basis, as the yellow metal settled at the $1706.60 level on the nearby futures contract, with the active month trading at $1713.80 on Mar. 31, 2020.

Gold moved steadily higher from the end of March until the yellow metal probed above the $1900 level in late May and early June. Bullish sentiment was growing until the price fell below $1900 a few days before the June FOMC meeting. It evaporated in the aftermath of the central bank’s latest report on the economy and a subtle shift in its tone regarding the futures of US monetary policy.

Gold is a currency and a commodity. The yellow metal has a unique role in the global financial system that appeals to at least three segments. Gold’s properties make it an industrial metal with a variety of applications. Individuals covet gold and embrace the metal as jewelry, ornaments, and a store of value. Central banks validate gold’s role as a currency as they hold the metal as an integral part of their foreign exchange reserves. Gold has a long history, dating back to ancient times.

Meanwhile, gold’s price fell in the wake of the June Fed meeting. The price action directly resulted from the market’s interpretation of the central bank’s change in attitude.  

Gold failed at the $1900 level

Nearby August COMEX gold futures rose above the $1900 level on May 25 after reaching a low under the $1680 level in March. Gold took a staircase higher throughout April and May. The $1900 level became a pivot point for the precious metal, reaching a high of $1191.20 on June 1. On June 11, less than one week before the June FOMC meeting, gold dipped below the $1900 level. It has not returned.

Gold Daily
Gold Daily

Source: CQG

The daily chart shows the decline in gold’s price that picked up downside steam on June 16 after the FOMC meeting. So far, gold dropped to a low of $1750.10 on June 29, and was at just over the $1770 level on June 30, not far from the most recent low. Gold has not challenged the March bottom, but the short-term trend remained bearish at the end of June.

Open interest, the total number of open long and short positions in the gold futures market at the 453,360 level on June 29 fell from 533,343 on May 21 when gold was on its way to the $1900 level. The 15% decline in the metric may not be a technical validation of an emerging bearish trend in the futures market, but it signifies long liquidation by frustrated gold bulls over the past weeks.

Daily price momentum and relative strength indicators were sitting near oversold conditions at the end of June. Daily historical volatility at over the 14% level was higher than when gold was at its recent high. Gold’s price variance tends to elevate when the price is in a bearish trend.

The Fed tightened monetary policy without tightening monetary policy on June 16

On June 16, the Fed’s statement was benign. The central bank left the short-term Fed Funds rate unchanged at zero to twenty-five basis points. It did not alter its quantitative easing program, saying it will continue to purchase $120 billion in debt securities each month. The central bank increased its GDP forecast from 6.5% to 7% for 2021. It also raised its inflation expectations from 2.5% to 3.4% for this year. The Fed increased the reverse repo rate by five basis points, a marginal rise.

Meanwhile, seven FOMC members said they forecast rate hikes on the horizon in 2020, with two voting members expecting two increases in the Fed Funds rate. The Fed tightened monetary policy with its statement and rhetoric without any substantial change in monetary policy at the June 16 meeting.

The prospects for higher rates weigh on gold

The prospects for higher interest rates weighed on gold’s price. After opening at just over the $1860 per ounce level on the August futures contract on June 16, the price fell by around $100 per ounce by June 18.

Higher US interest rates pushed gold lower because they increase the cost of carrying a long gold position. Gold competes with other asset classes for investment flows. Rising interest rates make debt securities more attractive than the precious metal. Higher US rates also increase the dollar’s role as a reserve currency. As the dollar’s yield rises, it tends to weigh on gold’s price. A stronger dollar has been historically bearish for the yellow metal.   

A shift from 'transitory' to 'temporary' does not change the trend

The Fed called rising inflationary pressures “transitory” as copper, lumber, and palladium prices rose to record highs in May. Grains and many other commodities reached multi-year highs. Energy prices continued to rally, and gold moved to over $1900 before the recent selloff. Asset inflation is not limited to raw material prices. Real estate is soaring. The Case Shiller Index of housing prices rose by an all-time high in May. The stock market is at record highs.

In another subtle shift, the central bank has shifted from “transitory” to “temporary” in characterizing inflationary pressures.

The shift in rhetoric may be subtle, but if the Fed has altered its view, it can do it again, and “moderate” inflationary pressures could be on the horizon in the coming months. The rhetoric does not change the trend. Prices are rising, which should come as no surprise given the tidal wave of central bank liquidity and tsunami of stimulus since the pandemic began in early 2020.   

Basel III could support gold - Buying on weakness has been the optimal approach for over two decades

Basel III, which took effect on June 28, 2021, classifies allocated physical gold as a tier-one asset class in the same category as cash. Unallocated gold balances will receive a haircut valued at 85% of the allocated metal. Holding paper gold, in the form of unallocated balances at bullion dealers or ETFs such as GLD, will have a lower classification. Basel III could increase the demand for gold bars and coins. Yogi Berra once said that “and they give you cash, which is just as good as money.” Gold at the highest tier in Basel III could increase the precious metal’s value as central banks, and financial institutions have further reason to buy and hold the metal as an integral part of their reserves.

For more than two decades, buying gold on price weakness has been the optimal approach to investing and trading the metal.

Gold Quarterly
Gold Quarterly

Source: CQG

The long-term quarterly chart illustrates since gold found a bottom at $252.50 per ounce in 1999, it has made higher lows and higher highs. The trend is always your best friend in markets, and in gold, it remains higher.

The Fed may have tarnished gold for the short-term with its rhetoric, but the central bank is behind the eight ball when it comes to rising inflationary pressures. Gold is an inflation barometer, with many markets screaming that inflation is rising. Expect gold to find another higher low and eventually reach higher highs in a continuation of the trend that began at the end of the last century.

Commodities: Gold Corrects Again As The Fed Makes A Not So Subtle Shift
 

Related Articles

Commodities: Gold Corrects Again As The Fed Makes A Not So Subtle Shift

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Rajan Mehta
Rajan Mehta Jul 03, 2021 7:18
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Such a long winded article, more just a statement of events, but no real conclusion or suggestion
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email