To finish! The price of gold has increased recently . As shown in the chart below, the yellow metal rebounded from the late March low of $ 1,684 to over $ 1,770 on Friday (March 16). This could be a promising start to the second quarter of 2021, which looks better than the first.
As you know, gold struggled early in the year, under heavy downward pressure created by improving risk appetite and rising bond yields. But the strength of these factors began to wane. You see, it looks like economic confidence has peaked, and it might be difficult for the markets to get even more euphoric.
Please see the chart below which shows the level of credit spreads – as you can see they have fallen to very low levels meaning they won’t be much lower than they are now . So it looks like the next big move will be higher credit spreads or lower economic confidence.
Second, Bond yield rally looks like it’s running out of fuel , at least for a while. Long-term real interest rates in the United States peaked at minus 0.56% on March 18 of this year. Since then they have been in a sideways or even downtrend, down to almost -0.70% last week, as you can see in the chart below.
As I explained several times earlier, the markets didn’t buy the Fed’s story of letting inflation rise dramatically without raising interest rates for weeks, if not months. However, it looks like Powell and his colleagues have finally succeeded in convincing investors that they are really serious about the new framework, which puts full employment over inflation.
Of course, there are also positive geopolitical factors contributing to the rebound in gold prices . Tensions between the United States and China, as well as between the United States and Russia, have increased recently. However, it appears that falling bond yields have allowed gold to catch its breath and the macroeconomic outlook – including credit spreads, interest rates, inflation, monetary policy, and fiscal policy. – will remain the main driver of gold prices throughout the year. .
Implications for gold
What does all this mean for the price of the yellow metal? Well, the recent rise in the price of gold is encouraging. What is important here is that this rebound occurred amid the flood of positive economic data . For example, initial jobless claims declined to 576,000, a lower than expected level and the lowest since the start of the pandemic, as shown in the graph below.
Additionally, retail sales jumped 9.8% in March, following a 2.7% drop in February, while the Fed’s Beige Book reported that “domestic economic activity has accelerated to a moderate pace from the end of February to the beginning of April ”. In addition, the Philadelphia Fed’s manufacturing index and the Empire State’s manufacturing index surprised us on the positive side.
The fact that gold held onto its gains and continued to rebound even after the release of several positive economic reports is bullish . Of course, it may just be that the reduction in real interest rates has simply outpaced other indicators, but it is also possible that the gold bears have grown tired.
Indeed, sentiment was so negative in the gold market that it couldn’t be much worse than it already was. Gold shone through the Great Lockdown and the Economic Crisis. But now, when the economy recovers, gold has become persona non grata . However, it could mean that we are either close to the bottom or that we have already reached the bottom. Only time will tell, of course, but the macroeconomic outlook looks rather favorable for the price of gold, especially if real interest rates stop rising or even start falling again.
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Arkadiusz Sieron, PhD
Sunshine Profits: An Effective Investment Through Diligence and Care