Heading into the last FOMC meeting we flagged one of the big risks for gold was, that ‘If the Fed signal that they will be hiking rates more quickly that will send yields surging. That will also send the USD higher and this will be negative for gold’. See full piece here from December 15 last year.
This is exactly what has happened as the Fed signalled three interest rate hikes to come for 2022 and the latest minutes show the balance sheet runoff may happen as soon as rates start to rise. This more bullish twist from the minutes has kept US 10 year yields rising. In fact, the whole curve has moved higher in expectations of faster and higher rate hikes.
At the same time inflation expectations have fallen which has lifted real yields sharply higher.
When real yields lift higher and the USD lifts higher too this is a strong headwind for gold. So, if this mood continues then gold should keep moving lower.
The two things to watch for
In the latest minutes, the Fed is expecting to continue with the hawkish bias, but three events could halt their plans. Firstly, if we see global stocks fall around 15%. That will get the Fed worried. Secondly, if we start to see signs of manufacturing and services slowing down in the US. If the PMI’s drop into contraction territory below 50. Finally, another twist from COVID-19 in terms of more lockdowns or a big shutdown from China. Until then real yields look set to gain and this does provide a strong headwind for gold’s seasonals.