Gold, Fed tapering and you
In 2013, when the Fed’s chair Bernanke announced bond tapering, there was a fast sell-off in gold. In fact, gold lost nearly 20% of its value over a few months. So, with the Fed ‘talking about tapering’ and gold falling off rapidly is this about to be another 20% fall in gold. Well, let’s take a look at some of the differences.
In 2013 there was a divergence between the Fed and the ECB. The ECB was cutting rates and doing QE. The Fed was looking at tightening. In 2013 there were disinflationary pressures and oil prices were falling.
Now in 2021, we have had a long period of dollar weakness. The Fed and the ECB are much closer to each other in terms of next steps with some on the ECB looking at reducing PEPP purchases. One major difference between 2013 and now is inflation. Inflation pressures are high and that means that real yields (nominal bond yields – minus inflation) can still fall lower even as the Fed looks to tighten.
So, the way around this is to make sure we watch three things.
1. Fed and ECB policy. Any sense in which the Fed move much faster than the Fed is USD strength and gold weakest.
2. Inflation. If inflation pressures quickly fade then that will mean real yields can start rising and that is a pressure for gold.
3. Real yields. Look at real yields and that will give you a heads up as to where gold will be heading.
4. US Treasuries: A fast push higher in US yields also will help push real yields higher – But don’t forget, we must, must, also know what inflation is doing. It is not just a case of rising US 10 and rising USD automatically equates to weak gold.
This guide will help you pick your levels and get the right feel for the gold market as we head into the next few weeks.
We are now approaching a seasonally strong time of year for gold. Over the last 10 years, gold has had an average gain of +6.08%. Usually, this is on the Asian wedding season and tends to see strong physical demand. However, physical demand is likely to be low, like it was for the Chinese New year.
So, this seasonal dynamic is more one to note, but not too strongly influence since the fundamental reasons for gold’s physical demand is hampered by COVID-19.