Since gold hit an all-time high in August last year, volatility has increased significantly and the centre of gravity has shifted sharply. Due to the frequent good news of vaccines, risk assets rose sharply, gold ETF fell in November last year, the price of gold fell 1800 US dollars / ounce. The subsequent increase in US fiscal stimulus expectations supported a rebound in inflation, driving gold prices higher again above $1950 an ounce. With the Fed's interest rate meeting in December signalling a gradual exit from the QE, gold prices were hit hard, reaching nearly $1800 an ounce at one point. For the future, the US fiscal stimulus is expected to be faster than the Federal Reserve to reduce QE, so gold prices remain optimistic in the first half of the year.
It will take time for the Fed to exit the QE.
According to the minutes of last December's Fed meeting, some officials believe that if the maximum employment and price targets are met, the Fed will gradually withdraw from easing, as it did in 2013-20114, leading to a sharp rise in 10-year Treasury yields, as high as 1.15%. Gold prices fell sharply. However, we believe that although there has been a marked improvement in the US job market, the unemployment rate has dropped from 14.8 per cent at the time of the outbreak to 6.7 per cent, but it is still much higher than the level before the epidemic, and non-farm payrolls unexpectedly fell by 140000 in December last year. The United States has not yet got rid of the epidemic, and the economic recovery still needs monetary policy support. Fed officials are divided on the direction of monetary policy, with some officials saying it is too early and even supporting keeping the current level of bond purchases unchanged until the end of the year. Therefore, the Fed's statement on the gradual withdrawal of QE is more about the expected management of the market, not implemented at the moment, and the room for long-term US bond yields to recover is still relatively limited. In addition, the Fed said it would not raise interest rates unless there was disturbing inflation and imbalances, so short-end interest rates would remain at the bottom, supporting gold prices.
The loose fiscal policy of the United States is on its way.
On December 27th last year, the US fiscal stimulus of 900 billion US dollars landed. At present, five rounds of fiscal stimulus have been launched one after another, with a scale of nearly 3.7 trillion US dollars. In early January, Biden unveiled a 1.9 trillion anti-epidemic rescue plan, saying that the US real economy had been hit hard and that the introduction of the stimulus bill was imminent. Ms Yellen supports more fiscal stimulus in the US, saying that debt levels will increase as a result, but with interest rates at historic lows, the wisest thing to do is to launch a massive stimulus package. the benefits will far outweigh the costs. And the Democratic Party of the United States has gained a narrow margin to regain control of the Senate, so the probability of passing the fiscal stimulus bill is still high.
The fluctuation range of gold price is expected to increase.
Since the outbreak, the real yield on 10-year US Treasuries has declined rapidly and then fluctuated at a low level. When gold hit an all-time high in early august, the real yield on 10-year u.s. bonds was at a low of-1%. The previous decline in real US bond yields and the strengthening of gold prices were mainly due to lower nominal interest rates, which will depend on whether the level of inflation can exceed the rebound in far-end interest rates. Considering that it will take time for the Fed to reduce QE, it is now more about expected management of the market, and a new fiscal stimulus in the US is expected to land in the first half of the year, so we believe that the rise in 10-year Treasury yields is not expected to be as large as the rebound in inflation, that is, there is still room for real yields to fall.
At present, many countries around the world have started vaccination work, but the vaccination progress is slower than expected, vaccine demand is strong, Pfizer and other vaccines are in short supply, so large-scale vaccination still takes some time. Although the negative impact of the epidemic on the economy has significantly weakened, the resonant recovery of the global economy is still weak. In the next six months, the market is expected to switch back and forth between the increase in global fiscal stimulus and the gradual tightening of monetary policy margins, resulting in gold price volatility.
To sum up, the gold rally driven by falling nominal interest rates on US bonds is over. Gold prices do not have the conditions for a continuous upward trend from April to August last year, but there is no need to be overly pessimistic. Loose fiscal stimulus in the US is still on its way, which in turn pushes up inflation and becomes the main driver of gold's rise. It is too early for the Fed to tighten monetary policy, and the recovery in long-end interest rates is relatively limited, so US bond yields still have room for decline, and gold prices are still available in the first half of the year. However, the market is expected to switch between the increase in fiscal stimulus and the marginal tightening of monetary policy, gold price volatility is expected to increase, or in the high wide oscillation, it is recommended to seize the phased long opportunity.
