Gold Prices May Rise Despite Muddled Yellen Remarks and Here is Why

By Margaret Yang9 days ago

GOLD PRICE OUTLOOK:

  • Gold prices may rebound after Treasury Secretary Janet Yellen clarified her interest rate comments
  • Market remains jittery about rising inflation and worsening pandemic situations in some emerging markets, buoying demand for gold
  • Gold prices may aim to breach US$ 1,800 – an important psychological resistance level

Gold prices rose slightly during Wednesday’s APAC trading session after falling nearly 0.8% a day ago. US Treasury Secretary Janet Yellen clarified that she wasn’t trying to predict interest rate hikes to rein in inflation pressure following a hawkish-biased comment on Tuesday. Markets have perhaps over-reacted on her earlier words, underscoring the fragility of risk assets amid fears about tapering Fed stimulus. A stronger US Dollar index pulled gold prices lower on Tuesday before giving up some gains. This could provide a basis for gold to recover some lost ground and move higher.

The recent rise in base metal, energy and agriculture prices has led to higher inflation expectations, which may boost the appeal of gold as a perceived inflation hedge. Signs of quickening price growth have pulled real yields (nominal yield – inflation) lower this week. The rate of the 10-year inflation-indexed security fell 6bps to -0.84% from -0.78% seen last Friday. Lower real yields may serve as a positive catalyst for gold prices, as the opportunity cost of holding the non-interest-bearing metal decreases.

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Although recent robust US economic data pointed to a stronger-than-expected recovery, the outlook remains clouded by a third viral wave that hit many other parts of the world. This could lead to weaker overseas demand, delays in economic reopening and supply chain disruptions. Against this backdrop, the Federal Reserve may continue to adopt accommodative monetary policy until its long-term inflation and employment targets are met. The central bank’s dovish stance is backed by Fed Chair Jerome Powell and President of the New York Fed John Williams, both of whom said it is still far to consider tightening.

Gold Prices vs. US 10-Year Inflation-Index Security

Source: Bloomberg, DailyFX

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