Saxo Bank's Quarterly Outlook: Fuelling the Energy Crisis
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Gold’s ability to defy gravity amid rising US real yields continues and yesterday it reached a two-month high as investors continue to rediscover gold’s attractiveness amid elevated stock market volatility, inflation been anything but transitory and growth concerns. Gold’s small dip last year following an extraordinary rally of 48% during the previous two years was driven by long liquidation from asset managers amid strong equity markets and low volatility as well as the belief rising inflation would turn out to be transitory, and not pose a longer-term threat to growth and price stability.
Towards the end of last year, a major change occurred at the US Federal Reserve after President Biden’s team likely made it clear the if Team Powell wanted to lead the Fed, it needed to focus on the 150 million Americans at work seeing their pay reduced every month in real terms by the Fed’s inaction on inflation, rather than focusing on maximizing accommodation to support the remaining six million unemployed in finding work. Both Powell and Brainard (the incoming Vice-Chair) complied and forcefully so and the hawkish shift in language helped send US ten-year real yields sharply higher as the market began pricing in four rate hikes in 2022 followed by another three in 2023.
Gold traded lower in early January as real yields began to spike higher but since then an underlying bid has slowly been driving prices higher. The are several reasons for the recent change in focus, and apart from current geopolitical concerns supporting a small bid, there are other and bigger drivers emerging, some of which are highlighted below.