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 few 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 while the market priced in a rapid succession of rate hikes, with more than five now priced in for 2022.
Since then gold, the most interest rate and dollar sensitive commodity has managed to withstand a 0.6% rise in US real yields. Apart from a small bid from current geopolitical concerns we see several other drivers emerging, some of which are highlighted below.
Gold has during the past few months been exhibiting rising immunity towards rising real yields with investors instead focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations as well as increased turbulence in the bond market. Even more aggressive rate hikes may end up being positive for gold as it will further raise the risk of a policy mistake from the Federal Reserve as it increases recessionary risks.