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(Kitco News) – Spring should be around the corner, because golden bears come out of hibernation. It was another difficult week for the precious metal, as the price could not keep the price of $ 1,750 per ounce.
The flawed price action is influencing market sentiment as more banks begin to lower their bullish forecasts for the year. Analysts at Commerzbank began the week, saying they saw gold prices rise by just $ 2,000 per ounce this year, up from their initial target of $ 2,300 per ounce.
On Thursday, Goldman Sachs followed suit as they also downgraded their gold forecast to $ 2,000 from their previous 12-month target of $ 2,300.
For both banks, the biggest obstacle to gold remains the significant sales of bonds, which increase the bond yields. The yield on the 10-year notes continues to rise higher, pushing above 1.6% and reaching a new one-year high. Although yields are still relatively low, they are sharply higher compared to 0.5% seen just six months ago.
The looming question on the market is how high can the Federal Reserve increase bond yields? Unfortunately, investors received no real answers from Federal Reserve Chairman Jerome Powell, who testified two days before Congress. Powell was quite evasive when it came to giving specific answers to politicians.
On the yields of bonds, Powell simply noted that the market is pricing a more robust and complete economic recovery due to stimulus measures from the government and the central bank supporting the economy. Instead of talking about a specific action, he reiterated that the central bank would maintain its ultra-accommodative monetary policy ‘for some time’.
Powell not only showed little concern about rising bond yields, but he also kept inflation fairly complacent. As everyone is focused on renewed economic activity in the US, they are ignoring the growing threat of inflation.
However, more and more investors are raising their own concerns. Michael Burry – the investor profiled in Michael Lewis’s ‘The Big Short’ book on the mortgage crisis and now running Scion Asset Management, sent a warning about inflation on Twitter.
“The US government invites inflation with its MMT-tinted policy. Sharp debt / GDP, M2 increases while retail sales, recovery of PMI stage V. Trillions more stimulus and reopening to increase demand as employee costs and supply chain rise shoot, “Burry tweeted Saturday, ahead of Powell’s testimony.
But this is not all bad news for the gold market. Although the yellow metal has struggled to gain new momentum, some analysts note that the recent price action is a sign of resilience. The yields on the bonds are high at one year, but gold may manage to support its June low.
“The reason we do not see a rush of gold is because some people think that the sale of bonds has been overdone, or that inflation will be more than expected,” said Axel Merk, president and chief investment officer of Merk Investments, said. .
On how high bond yields can go, Merk said he thinks sales are slightly exaggerated, but market momentum could push yields up to 2%.
So gold investors can expect to see turbulent waters soon; however, I want to point out one last thing. Although banks are starting to lower their high gold price targets, they are still sticking to the precious metal in the long run.
The reality is that central banks and governments worldwide continue to pump massive liquidity into financial markets. We have no idea how this is going to affect long-term inflationary pressures.
Disclaimer: The views expressed in this article are those of the author and may not reflect the views expressed Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, not Kitco Metals Inc. or the author cannot guarantee such accuracy. This article is for informational purposes only. It is not a request to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article does not accept the blame for losses and / or damages arising from the use of this publication.