The price of gold today rallied to a high of $1690 ahead of the North American open to briefly trade at fresh 7-year highs as bond yields have tumbled on the recent easing efforts from the Fed.
The surprise 50 basis points rate cut from the Fed this week has led to a sharp drop in the 10-year bond yield which last yielded a record low of 0.745%. In turn, gold prices have been underpinned and trade at highs not seen since 2013.
There are a number of things that have caused the sharp reversal higher in precious metals this week.
Not only did the Fed cut rates this week, but it also implemented a much larger than usual 50 basis point cut, and it did so ahead of its scheduled March meeting.
The markets have received the Fed’s message with a mixed tone. Initially, equities fell back on the announcement as it sparked fears that the impacts of the Coronavirus might have been underestimated considering the drastic Fed action.
Risk sentiment eventually kicked in during the week but soured just as quickly as the markets started pricing in further expectations for easing. For Gold bulls, this has been a win-win scenario.
The dollar has been falling on the back of lowered rate expectations as traders reprice interest rate differentials between the USD pairs. A weaker dollar is generally good for gold bulls even though the correlation is currently not as strong as it once was.
Equities have fallen back as the sudden easing efforts, and the markets desire for more easing, has triggered a shift to risk aversion. Once again, gold does well during periods of risk aversion.
Lastly, bond yields are at record lows, which reduces the opportunity cost for ownership of gold. Investors that had previously thought their money was making enough sitting in the bank collecting interest might look to alternatives such as precious metals.
What’s Next in Store for Gold Prices?
As long as the Futures markets continue to price in more easing, gold should theoretically continue to rise.
The question, which will arise at some point, is how far the Fed is willing to go. The Federal Reserve left a lot to speculation this week with its surprise interest rate cut. Some Fed members attempted to fill in the gap with speeches following the decision.
One possible scenario is that the Fed is trying to get ahead of things, cutting rates in anticipation of the worst. In such a scenario, it doesn’t seem likely that more rate cuts are coming as the past week does not seem to show an extraordinary escalation in the Coronavirus situation.
The Fed meets on March 18, and if the intention is not to cut further, they will likely try and make it known ahead of the meeting to avoid unnecessary volatility. In other words, as long as the Fed doesn’t try and level set the markets, further easing can reasonably be expected.
If the Fed comes out and says something to the effect of “we are ready to act if needed” it will confirm that policymakers are roughly along the same wavelength as the futures markets.
The latest CME data showed that another quarter basis point is fully priced in for the March Fed meeting. The data further showed a staggering 65% chance of a 50 basis point cut at the meeting in 12 days. This is up significantly from zero expectations of a large cut at the March meeting priced in yesterday.
Gold prices have been in a technical breakout since the summer. During bullish periods, the upside potential is significant.
The next big area of resistance is seen at $1788 which served to hold gold prices lower on three attempts over a one-year period starting from November 2011.
Over the near-term, the yellow metal shows slight signs of being oversold. Dips are likely to be bought as long as the view towards further easing does not change considerably. Near-term support is found at $1652.
Spot gold is up one percent for the day as of writing and has advanced 6.5% on the week thus far.