Where Did You Gold? - Rebound at Risk as Yields Aim Higher Ahead of FOMC

• The recovery in gold prices hangs in the balance as attention turns to the upcoming FOMC meeting.
• An upwardly revised Fed Funds dot plot could trigger extensive selling.
• However, hinting at the possibility of YCC or Operation “Twist” could underpin the anti-fiat metal.

Gold prices have crept cautiously higher since falling to 9-month lows on March 8, as the rapid sell-off in US Treasury markets subsided on the back of lacklustre February inflation data.

The core inflation rate dipped unexpectedly to 1.3% last month, while headline inflation held steady at 1.7%. This disappointing release cooled bets that the Federal Reserve will have to begin normalizing its monetary policy settings earlier-than-expected and took some steam out of the recent rally in bond yields.

However, the passing of President Joe Biden’s $1.9 trillion coronavirus-relief package, in tandem with the rapid distribution of Covid-19 vaccines, has stoked recovery optimism and may continue to underpin yields in the near term. Bullion’s peak in August of 2020 appears to have coincide with US 30-year yields bottoming out, which suggests that gold prices may remain under pressure if long-term rates extend gains.

Additionally, the Federal Reserve’s lack of concern surrounding the marked sell-off in Treasuries could spell trouble for gold bulls, with Chairman Jerome Powell failing to hint at any impending action from the central bank in his comments on March 4.

Gold Price vs US 30-Year Treasury Yields

Chart created using Tradingview

With that in mind, the upcoming Federal Open Market Committee (FOMC) meeting will likely dictate the trajectory of the anti-fiat asset over the coming weeks, with investors focusing intently on the central bank’s Summary of Economic Projections and whether or not policy makers are considering the implementation of Yield Curve Control or Operation “Twist”.

The Fed moving to cap long-term rates through YCC, or selling short-term debt and increasing purchases of longer-term maturities – in what is commonly known as Operation “Twist” – would be inherently bullish for gold prices. However, given the rhetoric from several Federal Reserve members, this seems fairly unlikely.

It also seems fairly unlikely that the Fed Funds rate dot plot will change in any meaningful way. That being said, if the median projection for 2023 were to suggest that the central bank will lift-off from the lower bound, a significant amount of downward pressure is to be expected on gold prices.

The more probable scenario is that the FOMC reiterates that it has a long way to go before achieving its mandated goals, and therefore will keep its monetary policy settings steady. This rather neutral response may open the door for gold to extend its recovery, should yields fail to break significantly higher.

Source – Federal Reserve