In recent weeks, one of the fundamental factors that analysts look at to predict future movements in the price of gold is the movements of the Federal Reserve and the possibility that it begins to dismantle the rescue program that it put in place march on the occasion of the pandemic, to avoid the collapse of the US economy. In this post we are going to explain the reason for this relationship and what will happen when the Fed makes that decision.
The buzz word in the markets in recent months is 'tapering'. Literally, this term means 'narrowing', but applied to the financial world, it refers to the gradual reduction of the extraordinary expansive monetary policy measures taken by central banks after an economic crisis, in this case, the one that occurred due to the pandemic.
Analysts and investors have been very attentive to the latest public interventions by the president of the US Federal Reserve , Jerome Powell, and the meetings held by the Board of the US central bank, to try to find out when the expected start will begin. tapering'.
A Million Dollar Program
Before delving into its consequences, it is necessary to explain what the aid program approved by the Federal Reserve consists of to reactivate the US economy after the pandemic.
In addition to other aid for companies and families, the program launched in 2020 contemplates the purchase of Treasury bonds, for a value of 80,000 million dollars per month, and mortgage securitizations, for another 40,000 million. That is, 120,000 million dollars per month.
As Craig Hemke explains, if the Fed decides to begin withdrawing from the US debt monetization program, this will mean that the bond market stops receiving 80,000 million dollars a month.
“Where are the buyers going to come from to replace the Fed to support the bond market? And if no new buyers appear, how far will interest rates have to rise to attract the investors needed to prevent the bond crash? Will 10-year bond yields have to go up to 3, 4% or even higher? The US can’t afford these nominal rate levels, so it doesn’t seem likely that the Federal Reserve will withdraw the program at this time ,” Hemke says.
The Us Economy, In Recovery
At the annual meeting of central bank governors in Jackson Hole (Wyoming, USA), three weeks ago, Powell himself alluded to the possibility of beginning the dismantling of the program, although he stated that substantial progress had not yet been made on the data economics required for it.
Indeed, the latest data on the US economy, specifically the employment data published on September 3, have been worse than expected. Job creation was just 250,000 jobs, a third of what analysts expected, so the conditions the Fed chair was talking about are not yet in place.
Added to this is the risk of contagion posed by the bankruptcy of the Chinese real estate company Evergrande, which worries global markets.
All of this suggests that the person in charge of the Federal Reserve is going to postpone the decision to initiate the withdrawal of the stimuli until at least December.
This impression is the one that analysts and investors in gold have. It must be remembered that Treasury bonds, the asset that the Fed is supporting with multimillion-dollar monthly purchases, are the main rival that the precious metal faces for the favor of investors.
If bonds continue to offer negative real (nominal minus inflation) yields, due to current low interest rates, gold will remain a very attractive asset, regardless of short-term price fluctuations.
It will be another matter when the Federal Reserve begins to raise interest rates and bond yields rise to the point where they begin to attract investors’ attention.
But, based on the indications coming from the Fed, this does not seem feasible in the short term. So let’s keep trusting gold.