Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

As Fed Worries About Inflation Should We Worry About Gold?

By Sunshine Profits (Arkadiusz Sieron)CommoditiesNov 30, 2021 10:55AM ET
www.investing.com/analysis/as-fed-worries-about-inflation-should-we-worry-about-gold-200609978
As Fed Worries About Inflation Should We Worry About Gold?
By Sunshine Profits (Arkadiusz Sieron)   |  Nov 30, 2021 10:55AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Oops! Gold did it again and declined below $1,800 last week. What’s happening in the gold market?

Did you enjoy your roast turkey? I hope so, and I hope that its taste – and Thanksgiving in general – sweetened the recent declines in gold prices. As the chart below shows, the price of the yellow metal (London P.M. Fix) plunged from above $1,860 two weeks ago to above $1,780 last week. It has slightly rebounded since then, but, well, only slightly.

Gold Prices in 2021.
Gold Prices in 2021.

What exactly happened? Funny thing, but actually nothing revolutionary. After all, the reappointment of the same man as the Fed Chair and the publication of the FOMC minutes from the meeting that had already took place earlier in November, were the highlights before Thanksgiving.

Well, sometimes lack of changes is a change itself and information about the past can shed some light on the future. Let’s start from Powell’s renomination for the second term as the Federal Reserve chair. In response, the market bets that the Fed will hike interest rates more aggressively in 2022 have increased. At first glance, the strong investors’ reaction seems strange, given that the monetary policy shouldn’t radically change with Powell still at the helm.

However, the continuation of Powell’s leadership implies that Lael Brainard, regarded as more dovish than Powell, won’t become the new Fed Chair – what was expected by some market participants. Hence, the dovish scenario won’t materialize, which is hawkish for gold.

Just two days later, the FOMC revealed the minutes from its November meeting. The main message – the Fed decided to taper its quantitative easing – was, of course, included in the post-meeting statement. The minutes revealed, however, that the Fed officials had become more worried about inflation and had expressed a more hawkish stance than the statement suggested.

First of all, we learned from the minutes that some central bankers opted for more aggressive tapering and a more flexible approach that would allow for adjustments in the face of high and persistent inflation:

Some participants preferred a somewhat faster pace of reductions that would result in an earlier conclusion to net purchases (…). Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures. Various participants noted that the committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the committee's objectives (…) participants noted that the committee would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.

This is because the FOMC members’ concerns about inflation strengthened. As we can read in the minutes,

They indicated that their uncertainty regarding this assessment had increased. Many participants pointed to considerations that might suggest that elevated inflation could prove more persistent. These participants noted that average inflation already exceeded 2 percent when measured on a multiyear basis and cited a number of factors—such as businesses' enhanced scope to pass on higher costs to their customers, the possibility that nominal wage growth had become more sensitive to labor market pressures, or accommodative financial conditions—that might result in inflation continuing at elevated levels.

Last but not least, the Fed officials also made other hawkish comments. Some participants argued that labor force participation would be lower than before the pandemic because of structural reasons. It implies that we are closer to reaching the “full employment”, so monetary policy could be less accommodative. What’s more, “some participants highlighted the fact that price increases had become more widespread”, while a couple of them noted possible signs that inflation expectations had become less anchored. So, the Fed officials’ worries about inflation strengthened.

Implications For Gold

What does it all imply for the gold market? Well, both the reappointment of Powell as the Fed Chair and the latest FOMC minutes were interpreted as hawkish, which pushed gold prices down. The more upbeat prospects for monetary tightening are clearly negative for the yellow metal, as they boosted the bond yields (see the chart below).

This is something I warned investors against earlier this month. I wrote in the Fundamental Gold Report on Nov. 16 that “when something reaches the bottom, it should rebound later. And if real interest rates start to rally, then gold could struggle again.” This is exactly what happened. Later, in the article on Nov. 18, I added that “I will feel more confident about the strength of the recent rally when gold rises above $1,900”.

Well, gold failed to do this, so I’m not particularly bullish on gold right now. We could say that gold did it again: it played with the hearts of gold bulls but got lost in the game, as it didn’t resist the pressure.

Yes, the new Omicron variant of coronavirus has been noted, and uncertainty about this strain could provide short-term support for the yellow metal. However, it seems that the prospects of monetary tightening and higher real interest rates will continue to put downward pressure on gold prices. I agree, the rally looked refreshing after months of disappointment. However, it seems that we have to wait longer, possibly for the start of the Fed’s increasing the interest rates, to see gold truly shining.

As Fed Worries About Inflation Should We Worry About Gold?
 

Related Articles

As Fed Worries About Inflation Should We Worry About Gold?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (6)
Casino Crypt
CasinoCrypt Nov 30, 2021 5:20PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I see your reasoning but you are zooming in only on Inflationary pressures. Considering the Brexit mess, Covid fallout , Supply chain issues and rash of geopolitical tensions   -  Gold should be well above $2000 .  However Banks are dru_nk with free, easy money so these toxic issues have been ignored.
Anasi Lindfors
Anasi Lindfors Nov 30, 2021 4:53PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Mr powell says whatever fits his mind games. Just short gold when ever he speaks and long when hes on vacation
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Nov 30, 2021 4:15PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
get ready for the 1960 kiss
James Martin
James Martin Nov 30, 2021 2:27PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Fed worries about inflation and can't do anything about it. If it raises rates it sets of a wave of loan defaults and a meltdown. Good for gold. If it does nothing good for gold. Buy every gold dip and win
Casino Crypt
CasinoCrypt Nov 30, 2021 2:27PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Yes Fed is powerless now. Hence why the talk and hot air year after year.
King Tolba
King Tolba Nov 30, 2021 1:26PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Dirty Powell continue the criminal activity to destroy price of gold. Yesterday Sayed inflation transitory but today he warning us from inflation .Powell plays the virtuous ****
simone scelsa
simone scelsa Nov 30, 2021 11:29AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Negative real interest rates are, apparently, so attractive to investors. Something does not add up.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email