By Barani Krishnan
Investing.com - The bond market has trouble buying Fed speak that U.S. rates will not go up anytime soon. And gold is paying again for that anxiety.
Gold for February delivery on New York’s Comex settled Thursday’s official session at $1,851.40 an ounce, down $3.50, or 0.2% despite Federal Reserve Chair Jay Powell saying the time for a rate hike is “no time soon” and that any increase will have to be on the back of meaningful economic recovery.
The benchmark gold futures contract actually shot up as high as $1,857.30 as Powell said that — before clambering lower on bond and forex traders’ notions that they knew better about the state of the U.S. economy than the head of the country’s central bank.
In post-settlement trade, by 2:35 PM Eastern Time (19:35 GMT), February gold was trading even lower than its close, at $1,847.30.
Bond yields for the benchmark U.S. 10-year note, meanwhile, flipped to the positive for the first time in three sessions, rising 3.3% to show a reading of 1.124 by that time.
The Dollar Index — the alternative trade to gold — fell as Powell ruled out an immediate rate hike, helping the yellow metal’s initial rally. While the greenback came off its lows later, it remained in negative territory. Yet, that did not help prop gold higher.
Surging bond yields have wreaked havoc on gold prices since last week, triggering a meltdown of more than $100, or 4%, from highs above $1,960 attained by the yellow metal at the start of the year.
The trend persisted on Thursday on ideas that the U.S. economy will somehow, miraculously, fix itself in the next few months from the coronavirus pandemic and pressure the Fed to hike rates — despite a coterie of Fed officials, with Powell being the latest — to deny that since Tuesday.
"What we're really saying is we're no longer going to raise interest rates just because for example, if unemployment were to be well below our current estimates of the natural rate of unemployment,” Powell said on Thursday at a live-streamed discussion hosted by Princeton University. “That wouldn't be a reason to raise interest rates, unless we see troubling inflation or other imbalances that could threaten achievement or our mandate, and there’s a significant change."
The Fed has held rates at 0-0.25% to provide relief to the economy since the coronavirus pandemic gripped the United States in March 2020.
The U.S. economy shrank 5% in the first quarter of last year and 31.4% in the subsequent three months before rebounding 33.1% in the third quarter. Fourth quarter performance has not been finalized yet.
Notwithstanding the rebound in the third quarter, the U.S. economic outlook remains dire with Covid-19 hospitalizations and deaths hitting new highs in recent months. The United States also remains the country worst-hit by the pandemic, with more than 23 million cases logged since January 2020 and over 385,000 deaths from those.
Powell said there was “plenty of slack” in the labor market and it was unlikely wage pressures would reach levels that could create or support higher inflation.
“Also, the other factor to look at is the world shortage of demand. In lots of large advanced economies, in countries around the world which began this crisis, there are deeply negative interest rates and little policy space for interest rate hikes. All that is going to hang around for a while, and you know, the U.S. economy is strongly integrated with the rest of the world. That's going to matter."
The United States lost more than 21 million jobs between March and April 2020, at the height of business lockdowns forced by the coronavirus. A rebound of 2.5 million jobs was logged in May and 4.8 million in June, before the recovery began slowing. For both September and October, less than 700,000 jobs were added each month. In November, there were just 245,000 additions while December saw a loss of 140,000 jobs — the first such decline since April.
The weak trend in the labor market has continued into 2021, with 965,000 Americans filing for jobless benefits last week, up 23% from the previous week, and the highest in nearly five months.
President-elect Joe Biden, who takes office on Jan. 20, has promised to issue “trillions of dollars” of stimulus, with the first announcement of $2,000 checks for individuals and separate aid for states and businesses likely to come later on Thursday.
Last year, after the first $3 trillion Covid-19 stimulus by the Trump administration in March, both yields and the dollar collapsed, pushing gold futures shot to record highs of nearly $2,090 by August.
This time around though, the two are rising and gold is falling — as though currency debasement is a good thing for the greenback and a bad thing for a safe haven like gold.