Spot gold (XAU/USD) has continued to advance as the US session has gotten underway, recently breaking out to fresh one-month highs above $1792 and nearly testing the psychologically important $1800 level. The precious metal has seen choppy two-way trade since Wednesday’s Fed policy announcement, initially dropping to multi-week lows in the low $1750s, before reversing to current levels near $1800.
The reversal higher comes despite what most analysts agreed was a slightly more hawkish than consensus expectation tone to the Fed on Wednesday. Most importantly, the bank indicated three rate hikes in 2022, doubled the pace of its QE taper and Fed Chair Jerome Powell was bullish on the economic outlook for 2022. Nonetheless, gold is up as the dollar weakens in what appears to have been a “buy the rumour, sell the fact” reaction to Fed hawkishness. XAU/USD has run into significant resistance in the form of its 21, 50 and 200-day moving averages, all of which reside in the $1790s.
The fluctuation in precious metal markets is a function of volatility in US government bond and Short-Term Interest Rate (STIR) markets. In the former, real yields have been getting a battering, with the 5-year TIPS yield now back to around -1.57% having nearly hit -1.30% in its initial post-Fed reaction. Meanwhile, the implied yield on the December 2022 three-month eurodollar future has pulled back from as high as 1.10% in the aftermath of the Fed meeting to under 1.0% again.
For whatever reason (perhaps because Powell alluded to a slower pace of rate hikes if the economy slows), bond and STIR markets seem to be reacting dovishly to the Fed and this is helping gold. As markets get more time to digest what happened this week, this bias may be dropped. For those expecting a strong US economy and hawkish Fed in 2022, near-$1800 might be a good entry point for shorts.
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