US Economic Data Keeps Gold Subdued on Reopening Narrative
Following the major economic backdrop generated by the COVID-19 pandemic, the USA is now facing one of the sharpest recoveries in its history, fueled by vaccination, low infection rates, and also strong support from both the fiscal and monetary side.
The Federal Reserve has reduced interest rates back to zero, conducted QE, and offered overnight lending via repo markets, and also via swap lines to other central banks in need of US Dollars. As the USA weakened, the price of gold rose throughout 2020, yet found a top in August, due to several important factors.
photo/Gerd Altmann
Strong USA rebound after the pandemic
Based on the latest job report for May 2021, the US economy added back 559,000 jobs, driving the U3 unemployment rate to 5.8%. The GDP is currently projected to rise around 7% on an annualized basis, which means that the losses suffered during the pandemic will be erased, at least on a nominal term.
With around 45% of the eligible population vaccinated against COVID-19, the prospects for major restrictions heading into fall and winter are reduced. Although many businesses continue to struggle, that’s not the case in the financial industry, where the stock market trades new all-time highs.
Rising treasury yields – negative for gold
One of the main headwinds for gold since August 2020 has been rising US Treasury yields. Even though gold trading is available not just for the institutions, but also for retail traders via brokerages like Axia, that did not help the price of gold reach new all-time highs and expand above the $2,000 mark.
Historically speaking, gold performs poorly during rising yields and that pattern has unfolded successfully once again.
Risk assets favored by investors
Although it managed to break above the 2011 all-time high, gold has been unable to remain above it, a technical development suggesting short-term bullish weakness, based on Axia’s expert analysis. Both institutional and retail investors were focused on the stock markets and cryptocurrencies, two asset classes posting impressive price developments during a short span.
photo/ Steve Bidmead via pixabay
As a result, the market is still waiting for a new catalyst that might push the gold price higher. In the longer run, projections are favorable for the precious metal, since fiat devaluation is expected to continue. Combined with elevated inflation, that could be an environment in which gold can outperform other asset classes.
US Dollar upside bias on Fed rate hike projections
Another important setback for gold is expected due to the recent rise in the USD. After the latest FOMC meeting, the markets had started to price, as interest rates in the USA are projected to rise as early as 2022. Massive amounts of fiscal spending, combined with bottlenecks in supply and the base effects, have pushed inflation to levels not seen in 20 years, putting the central bank on guard in case it needs to step in and avoid out-of-control price increases.
The broad consensus is biased towards transitory inflation, which is why interest rates are trading way below nominal inflation rates. If markets change their course, that could have an impact on asset valuations, including gold, which might dip in the short-term on the back of a stronger US Dollar.
Author: JR
