2% bond yield would force the Fed to act, and that is good for gold price - Chantelle Schieven
The gold market continues to struggle as bond yields hold near a one-year high above 1.6%; however, one market analyst said there is a strong floor as the bond market selloff cannot last much longer.
While the gold market might not see record highs again in 2021, Chantelle Schieven, head of research at Murrenbeeld & Co, said in a telephone interview that gold is still on track to end the year higher from where it started, despite the recent lackluster price performance.
“I think we have seen the lows in the gold price,” Schieven said. “Whether the is $50 lower or a $100 lower, there is this floor in the market because we know that there’s going to be a limit for how high yields can go.”
As to how high yields can go in the near term, Schieven said she thinks the market’s pain threshold is around 2%.
“If yields go up any further than that, consumers are going to be in trouble,” she said. “I think if we see a further move to 2%, then central banks will start trying to jawbone the markets.”
The comments come ahead of Wednesday’s Federal Reserve’s monetary policy meeting. The Federal Reserve is expected to strike another dovish tone, reiterating their outlook that interest rates aren’t likely to go anywhere anytime soon. However, markets are once again looking for any guidance on a potential yield curve control program. Before the central bank’s blackout period, Federal Reserve Chair Jerome Powell was somewhat blasé regarding the rise in the bond yields.
Schieven said that the Federal Reserve could start to layout a broad-frame work for capping bond yields; however, she added that it could take a few more meetings before the complete picture is revealed.
“The central bank is in a very precarious situation, so they won’t be too quick to act one way or another, but you know there are going to be a lot of interesting closed-door discussions about the rise in bond yields,” she said.
Although bond yields are rising, which keeps a cap on gold prices in the near-term, Schieven said that investors also need to focus on real interest rates. She added that she expects real interest rates to remain in negative territory as the inflation threat grows.
Schieven noted that a lot of consumer capital has been sitting on the sidelines because of the pandemic. She added that when the U.S. economy does fully reopen, there will be a lot of pent-up demand hitting the stores. The potential for consumer spending just increased significantly after the U.S. government passed its $1.9 trillion stimulus bill, which will see some American consumers receive $1,400 checks before the end of the month.
“The central bank wants to see higher inflation but be careful of what you wish for,” she said.
Although gold prices are not expected to push back to record highs by the end of the year, she said that the market is still on pace to move back above $2,000 an ounce in the next couple of years.
“Gold has lost a bit of its shine right now, but there are still a lot of reasons why you should hold gold,” she said.