Price of Gold Fundamental Daily Forecast – Lack of Clarity from Fed Over Policy Shift May Underpin Prices

The U.S. Dollar fell on Friday as the Fed’s new policy framework suggested that interest rates would remain low. Fed Chair Powell on Thursday said the central bank would adopt an average inflation target – meaning rates are likely to stay low even if inflation rises a bit in the future.

On Friday, December Comex gold settled at $1974.30, up $42.30 or +2.19%.

US Dollar Weakens on Fed Policy Shift

The greenback resumed its slide against a basket of major currencies in the wake of Fed Chair Jerome Powell’s remarks at the virtual Jackson Hole conference of central bankers. Powell said the U.S. central bank would seek to keep inflation at 2%, on average, so that periods of too-low inflation would likely be followed by an effort to lift inflation above 2% for some time.

Longer-Term Treasury Yields Higher as Fed gives More Framework Details

Longer-term U.S. Treasury yields rose on Friday as U.S. Federal Reserve officials fleshed out the central bank’s new approach to inflation, while investors rebalanced intermediate-dated debt following large auctions earlier this week.

Longer-term yields climbed sharply after Fed Chair Jerome Powell on Thursday unveiled the bank’s new approach to monetary policy that puts more emphasis on fighting shortfalls in unemployment and less weight on concerns about higher inflation.

The benchmark 10-year yield was down a basis point at 0.7359% in afternoon trading, while the five-year note was down 3 basis points at 0.2799%.

The yields on the 30-year U.S. bond reached as high as 1.577% after Powell spoke, its highest since June 16. In trading on Friday afternoon it was up 1.8 basis points at 1.5182%, as Federal Reserve officials diverged about what the new strategy might mean in practice and said there was no exact science on how it might be applied.

Short-Term Outlook

On Thursday, after Powell announced the new Fed strategy, gold prices declined. On Friday, gold prices rose. I think the key to the next major move in gold will be determined by how investors interpret the movement in the Treasury markets.

The higher yield on the 30-year reflected that “People have less conviction on the long end, given that we don’t know what the Fed is going to do,” said Priya Misra, head of global rates strategy for TD Securities.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 59 basis points, about even with Thursday’s close, a level unseen since June 10.

It’s easy to say that the Fed is going to keep rates near historical lows for several years, but what happens when short-term rates go down and long-term rates go up? Is it bullish, bearish, or neutral for gold?

We may not know until the professional money managers figure out what the Fed is trying to do. Even Fed officials diverged about what the new strategy might mean in practice and said that there was no exact science on how it might be applied. If this is the case then it seems gold investors may adopt the “when in doubt, buy gold” philosophy on Friday.

For a look at all of today’s economic events, check out our economic calendar.