Traders continue to offer higher returns despite Federal Reserve statement

‘Something is happening here, which is not exactly clear’ – Stephen Stills

Immediately after the conclusion of the FOMC meeting yesterday, we saw gold move a strong contraction moving from double unchanged to double higher. Many analysts have interpreted the gain as a direct result of the Federal Reserve’s statement, which contains the most recent ‘dot plot’, indicating that interest rates are likely to remain where they are until 2023.

In foreign trade, however, gold continued to climb higher when it opened in Australia on Thursday morning, but then started selling under pressure as it moved to Hong Kong and London. The main events that caused gold prices to weaken were dollar strength and higher yields in the US, Treasury notes said. In fact, the ten-year treasury yield reached more than nine basis points, moving the current yield to 1.73%. An absolute negative factor for gold that puts clumsy pressure on the metal.

This suggests that even with the definitive show that President Powell is once again conveying the intention of the Federal Reserve to keep interest rates long where they are. While market participants continued to look for good economic data, they still remained yields in anticipation of an interest rate hike that ignored the points raised by the Federal Reserve as well as Jerome Powell statements.

However, following the trading of the gold base in New York, the most active Comex contract gained significant ground in April 2021. And although it closed well from its high, which was $ 1754, it did reach $ 7.50, or 0.43%, and is currently set at $ 1734.60. At the same time, the rise in gold occurred with an extreme dollar strength, which was also about 0.045% higher. This means that if the dollar were neutral today, we would see a gold rise by about $ 15.

Another interesting aspect was the negative correlation in terms of price change between spot or Forex gold and gold contracts. Although spot gold is still slightly above the price of April’s futures contract, the net change on the day was a nine dollar drop on the spot compared to a positive profit of $ 7.50 in gold contracts. According to the KGX (Kitco Gold Index), today’s decline of $ 9.00 is a combination of dollar strength and selling pressure. The vast majority of the current change occurred due to the dollar strength that made up $ 7.85 of the decline, with the remaining $ 1.15 leading to spot gold at $ 1736.50.

At least for today, gold futures could overcome both dollar strength and higher returns on U.S. treasuries, which rose to a 14-month high. Many analysts believe that unless the Fed intervenes to address the difference between short-term and long-term bonds, and that the yield in the 10-year note could trade as high as 2%. This is only 0.02% off the yield before pandemic, which was at 2.2%.

There is no doubt that analysts, market participants as well as traders are still glaring at the statement released yesterday and working through President Powell’s statements, not only on the words but also on the attitude. Although he has focused for at least two years on keeping interest rates almost zero, it seems that market sentiment does not agree with the assessment. There are analysts who believe that if the solid economic data is still ahead, it will force the Fed to raise rates sooner than they expected.

This is contrary to the rulings and determination of the Federal Reserve not to make the same mistakes that occurred in 2008 by raising rates too quickly. In the words of Chairman Powell, this will be the pandemic that determines the actions of the Federal Reserve, and they will not act in a way that could impede a full recovery in the fastest period.

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I wish you, as always, good trade,