First about gold – The price of gold exploded, the Fed lost the door to the market

First about gold – The price of gold exploded, the Fed lost the door to the market
First about gold – The price of gold exploded, the Fed lost the door to the market

Around June 2022, the b trend for gold started after a strong decline in the same year as a result of the rising rates of the American central bank (Fed). This b trend continued into the day and the price of gold first exploded above the upper edge of the rising channel at USD 2,280 per troy ounce (not more than K 1,700/gram). What are you doing? Probably 3 factors, central bank purchases, developing market and declining Fed credibility. According to him, it looks like this trend will continue in the coming years.

How to perceive gold?

Gold can be seen as two things: a commodity and a currency. Gold is a commodity in the sense of using the metal for industrial purposes, for making feathers, decorations, etc. To me, it is in the sense of a historically reliable store of value. If we stick to the second point of view, then in the modern monetary system, the attractiveness of gold is assessed in relation to the real income of individual currencies, especially the US dollar. The real import of the dollar is determined by the import of US corporate and government bonds (they are higher than annual Fed rates) adjusted for inflation. That is, if the 10-year US government bond now yields 4.2% pa, how can the preference for gold, which has a negative yield compared to BNM (investment pay for safety), be drained? This can be explained, for example, by the fact that inflation has increased. Then, in the case of gold buyers, the real import of the US dollar is less and the negative import of gold is smaller, so they decide to buy gold. So is the meteoric rise in the price of the light metal this summer a reflection of your inflationary expectations?

At BHS, we think yes. it’s about you, not expected US inflation in January and Norway and Fed doves are factors that lead to rising expected inflation. However, geopolitical tensions and rapid gold purchases by central banks in recent years, compared to the pace before the pandemic, also play a role. The US dollar is perceived as a risky currency after the sharp decline in the value of US bonds in the last five years. Central banks are therefore diversifying this risk and very slowly replacing risk-free US government bonds with gold. So do the residents of developing countries, who now perceive the US dollar as risky and the only alternative for them is often gold. The rate and average consumption of light metal is also growing due to the growing wealth of developing countries. Recently, as a result of the strong development on the capital market there and in the economy, according to the Goldman Sachs survey, the consumer had more to look for first in gold.

Fed loses credibility

The market is looking at the actions of the US Fed with growing skepticism after the last public dove macroeconomic forecast (SEP) and the related press conference of the Fed Jerome Powell. To the surprise of many market experts, the Fed ignores the strongly relaxed financial conditions this year (increasing real availability, strong stock growth, irrational behavior around technology titles and cryptocurrencies). In addition, refuse to play the role of slowing down disinflation and you, not the expected inflation in the US for the months of January and November. Jerome Powell argues that financial conditions are not relaxed and inflation may fall despite the change, because it was the case last year. The recent economic recovery, the growing number of consumers and entrepreneurs, markets at record highs, and now inflation is rising beyond expectations, which makes some residents nervous.

Usually, when the central bank loses credibility, it can be traced, for example, to the rising nominal income of government bonds and inflation-indexed bonds. Although both have been growing at a slight pace in the United States since the beginning of the year, they have not yet reached a significant increase. As we could see all last year, the US government manipulates the bond markets and artificially increases the bond yields. Debt made it simple by massively issuing bonds with very short maturities, which limited the supply of those with maturities. The question here is how favorable the current development on the bond market is.

What is being manipulated is the gold market. The Fed, and therefore the US government, can issue any amount of bonds at any time and thus affect their yields. You can’t do this with gold. So is gold ahead and because real incomes will fall (also due to high inflation or falling annual rates)? Maybe a combination of both, if the Fed refuses to push inflation down and begins to loosen monetary policy this summer, we think this could lead to a significant increase in inflation. Hence, the healthy Fed did not make such a decision, and in this year we can talk about a maximum of one dream year of rates, and that at the end of the year. Gold is a sign of Fed skepticism. This is one of many signs of the Fed’s declining credibility. That gold reacts to the Fed could be observed, for example, after Jerome Powell’s last entry (March 20), when gold reacted with a steep rise and at USD 50 per troy ounce during the day.

The article is in Czech

Tags: gold price gold exploded Fed lost door market


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