Gold Bludgeoned Again by U.S. Yields Amid Rate Speculation

© Reuters.

By Barani Krishnan

Investing.com - Gold was bludgeoned again by the scythe of U.S. yields on Tuesday amid relentless talk that the Federal Reserve will be pressured to raise rates sooner rather than later to arrest galloping inflation.

U.S. gold futures’ most active contract, December, settled down $14.50, or 0.8%, at $1,737.50 per ounce on New York’s Comex. It hit a bottom of $1,727.60 during the session for a seven-week low.

“Treasury yield curve steepening is driving the dollar higher and dampening demand for bullion,” said Ed Moya, analyst at online trading platform OANDA.

“Rubbing salt in gold’s wound is that it is not attracting any safe-haven flows as risk aversion accelerates with the S&P 500 having its worst outing since May, the Nasdaq its worst performance since March, and as the Dow turns negative for the quarter.”

The yield on the U.S. 10-year Treasury note was at 1.532% by 2:50 PM ET (18:50 GMT), rising 2% in just under a week from a reset of inflation expectations.

The Dollar Index, pegged against six major currencies led by the euro, was up 0.4% at 93.75.

“If global bond yields continue to rise, gold seems vulnerable to a test of the $1,700 level,” Moya added.

At his news conference after the Fed’s September policy meeting last week, Chairman Jerome Powell suggested mid-2022 as an appropriate target for concluding the central bank’s monthly bond-buying of $120 billion. The Fed’s so-called dot-plot plan also called for interest rates, suppressed at near-zero since the Covid-19 outbreak, to be raised any time next year onwards, he said.

Since then, Fed officials have issued mixed messaging on the timeline for both the taper and rate hike. Powell has admitted that inflation was trending above the Fed’s 2% per annum target but said that was transitory and will abate over time. He reiterated that before a Senate banking committee on Tuesday, although he admitted that supply chain issues resulting from the Covid-19 pandemic need to be resolved before inflation can be mitigated.

The question of when the Fed ought to taper its stimulus and raise interest rates has been hotly debated in recent months as economic recovery conflicts with a resurgence of the coronavirus’ Delta variant.

The Fed’s stimulus program and other monetary accommodation have been blamed for aggravating price pressures in the United States. The central bank itself has spent an estimated $2.2 trillion in propping up the U.S. economy with its stimulus program since the Covid-19 outbreak.

Besides the central bank’s spending, federal government aid for the pandemic, which began under the Trump administration, has reached at least $4.5 trillion to date. And the Biden administration is asking Congress to approve almost $4 trillion more for its so-called “Build Back Better” plan

After declining 3.5% in 2020 from business shutdowns owing to Covid-19, the U.S. economy expanded robustly this year, expanding 6.5% in the second quarter, in line with the Fed’s forecast.

The Fed’s problem, however, is overwhelming inflation and an underperforming job market.

The Fed’s preferred gauge for inflation - the core Personal Consumption Expenditures Index, which excludes volatile food and energy prices - rose 3.6% in the year through July, its most since 1991. The PCE Index including energy and food rose 4.2% year-on-year.

The Fed’s own target for inflation is 2% per annum.