Fed’s Powell Brings a Boost to Gold
Thursday, 18 March 2021
In recent updates we talked about rising US bond yields having a negative impact on precious metals prices for the early part of this year. We also noted that interest rates in the US cannot be allowed to rise materially without a major credit crisis and that the Federal Reserve would have to step in at some stage to calm the bond market. This is precisely what we saw this week with Fed Char Jerome Powell delivering a ‘dovish’ statement in the latest FOMC rates decision, projecting interest rates in the US to stay near zero through the end of 2023 at least.
Gold rose over 1% during the statement to USD $1,748 and silver reacted positively too, up 1.5%. Although precious metals reacted positively, there was no specific mention of the Fed stepping in to expand its bond buying program just yet, so 10Y treasury yields remain elevated above 1.6% for now. Powell also projects that a bump in inflation this year will be short-lived, seeing inflation around 2% for 2022 (bit of forecasting on a whim there). On asset purchases, these were left unchanged at $120 billion per month and Powell repeated that this pace would continue until “substantial further progress” is made on their employment and inflation goals.
Gold in $USD
Silver in $USD
Despite 379,000 US jobs added in February there are 9.5 million fewer Americans with a job compared to a year ago, and inflation remains well below 2%. We can expect the Fed to remain dovish for an extended period of time, which should help put a floor in precious metals prices. With note to the Federal Reserve’s ‘dot-plots’ which track Fed members forecasts of interest rates in the months or years to come, these are historically very inaccurate and usually always on the more optimistic side when it comes to an economic recovery and higher rates. Although more members on the latest dot plot assume higher benchmark rates in the next two years, you can go back and look at previous dot plots to see how horrendously wrong they have been in the recent past. It is a wonder why anyone pays any attention to them, as the Fed are probably the worst forecasters on the planet, and we all remember Bernanke’s ‘soft landing’ in US housing prediction pre GFC. Simple fact is that the US has far too much debt to handle higher interest rates without imploding.
Speaking of debt, a recent CNBC video below covers the US Corporate Bond Markets $10.5 Trillion dollar debt bubble which comes highly recommended. When you take a close look at government, corporate and household debt in the US compared to GFC levels, it is quite obvious that higher interest rates are impossible without a major crisis.
To the longer-term Gold chart below, we have managed to stay above the recent uptrend line in $USD terms (which is positive) and have had a few buy signals from a technical perspective, as the price now starts to recover from a very oversold environment. The $1,680 level looks like a significant bottom in the market and we would be surprised if that is not in fact the low for 2021. A resurgence in Asian demand and a capitulation in ETF speculators has helped us put a floor in the price for now.
Silver remains in high demand globally, and has largely been tracking sideways for the past few months. Price action remains positive for now as we put in a convincing higher low at USD $25 just recently. The trend remains positive and physical supply remains tight. Perth Mint has still got very limited availability of cast bars, but we have alternatives online currently for kilo silver cast bars.
To the Aussie dollar now, we had a spike from 0.77 to 0.78c on Thursday on the latest job’s numbers from February. Australian unemployment has fallen to 5.8% with 89,100 full time jobs being added for the month. As mentioned in last weeks update, be aware that Jobkeeper ends in March and these numbers should print in a few months to see what damage that does to the labour market.
In the US the stimulus checks have been rolling out and there is much discussion over whether or not they could cause inflation to start rising. One thing that would prevent the CPI from budging would be if everyone simply lumped their stimulus check into financial markets. Obviously, there are many American’s struggling to get by, so this won’t happen, however there are some 35-40% of recipients that plan to spend at least a portion of their ‘stimmy check’ on either stocks or bitcoin!
The theme we cannot get away from recently is the appetite for risk in the US, as it seems to be at an extreme. A new paradigm of risk taking in financial markets, one where there is no incentive to save in cash, so the popularity of retail investing amongst the least experienced crowd has been exploding. With what little cash they can spare Americans are throwing it at bitcoin and US stocks. Could the stimulus checks hitting financial markets in the coming weeks be the last of what’s left in the retail investor tank?
Until next week
Guardian Gold Sydney
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