Spot gold hit a new low of nearly four weeks, it seems that the possibility of FED mistakes has to be considered
On Monday (June 14), spot gold hit a new low since May 19 to $1,849.71 per ounce. Traders further reduced their long positions before the highly anticipated Fed policy meeting, which may herald a change in the outlook for US monetary policy.
At 20:13 Beijing time, spot gold fell 1.39% to US$1851.35 per ounce; the main COMEX gold contract fell 1.44% to US$1852.6 per ounce; the US dollar index rose 0.03% to 90.529.
Recently released data showing that inflation has soared, aroused widespread concern that the U.S. economy’s recovery from the new crown epidemic, triggering upward price pressures, may force policy makers to reduce monetary stimulus measures earlier and push the dollar to rebound. The U.S. index last week The last trading day closed sharply higher than 0.5%.
The Fed may be right?
The Fed will hold a new policy meeting on June 15-16. Policymakers have repeatedly stated that the rise in inflation is temporary, which will help quell these concerns, but the market now expects the Fed to provide new clues on the timing of exiting the ultra-loose policy.
Steven Oh, head of global credit and fixed income at PineBridge Investments, asked: “Is inflation temporary or more structural?” Will the Fed lose control of it in the future and make policy mistakes without the ability to control it? “
To be fair, the Fed may be right: this inflation burst may be temporary. The reopening of the economy has released a surge in suppressed demand, while supply bottlenecks are restricting production and distribution. As things return to normal, inflation should calm down.
Bryan Koslow, head of the Clarus Group, a wealth management company, said: “People will see a lot of inflation-related issues in their daily lives, but we may have witnessed it reaching its peak, especially in terms of wage growth.”
Anand Rathi Shares & Stock Brokers Commodity Fundamental Research Analyst Jigar Trivedi said:“Gold’s short-term outlook is bearish. Having said that, investors are now turning their attention to the Fed’s monetary policy decision later this week, and it is expected that the Fed will continue to maintain its ultra-loose policy until the economy further recovers.”
August or release new clues
Bloomberg economists said that in the context of accelerating economic growth and inflation, the Fed expects to raise interest rates in 2023, but Fed officials will not hint this week to reduce the scale of bond purchases before August or September to release the message. The Fed is expected to reiterate this week that it will adjust its bond purchase plan only after the U.S. economy has made “further substantial progress” toward employment and inflation targets.
Bloomberg Economics predicts that the Fed will issue an early warning signal in the second half of this year, possibly at the Jackson Hole Central Bank’s annual meeting in August, beginning to reduce the scale of bond purchases in early 2022. If employment growth accelerates in June and July, it should help strengthen the judgment of policymakers that the economy is expected to significantly reduce the employment gap before the end of the year.
NAB strategist Jason Wong wrote in a report:“Investors’ adjustments to dollar positions show that the market was a little nervous before the announcement of the Fed’s New Deal. In the past month, it seems that more and more people believe that it is time for the Fed to discuss reductions in bond purchases.”
Scott Anderson, chief economist at Bank of the West, said: “Despite the recent rebound in inflation and inflation expectations, the Fed will continue to be patient with raising interest rates and reducing bond purchases. However, the Fed is expected to acknowledge that it is moving towards Good progress has been made towards this goal.”
Some Fed officials, represented by Vice Chairman Clarida, said that the committee may decide whether to reduce the scale of debt purchases in the “upcoming meeting” based on the performance of recent macro data. Others including Dallas Fed Chairman Kaplan Some officials said that it is “good soon but not too late” to discuss reducing the scale of debt purchases.
Morgan Stanley analysts wrote in a research report:“Although we admit that given the noise in the recent data, there is uncertainty about the Fed’s reduction of easing, but we believe that the dollar risk… is still somewhat asymmetric and biased to the upside, although the pace of appreciation may depend to some extent on the Fed’s recent Speech.”
Almost everything goes up in price
But investors also need to consider the possibility of the Fed making mistakes. The risk of inflation continuing to exceed the target is obviously much higher than usual, while the risk of inflation falling below the target is lower. The bond market hardly left large forecast errors, and the 10-year Treasury bond yield was only 1.45%. The five-year balance of payments ratio-the bond market’s best predictor of long-term consumer price inflation-fell from a peak of 2.38% to 2.23%, which means that inflation basically meets the target set by the Fed.
Barclays Global Inflation Research Leader Michael Pond pointed out that the last time the Fed threw out the “temporary theory of rising inflation” was in 2011, and that time was correct. The European Central Bank’s two interest rate hikes that year were widely regarded as wrong, leading to a series of economic problems in the region.
Moira Ritter of CNN Business pointed out that the prices of almost everything are rising, the real estate market continues to prosper, and the price of wood soars, which causes the prices of sofas and other household items to rise sharply; second-hand cars are also much more expensive, due to the shortage of chip supply. New car production; more and more people travel, and the price of air tickets soars. People are looking forward to “the hot summer of prices”.
Economists believe that the accelerated vaccination program and expansion of fiscal stimulus in the United States, especially the infrastructure and employment support programs proposed by President Biden, have caused recent inflation data to rise, which will put the economy at risk of overheating.
SkyBridge Capital Chief Investment Officer and Senior Portfolio Manager Troy Gayeski said: “The Federal Reserve must take inflation seriously.” He believes that there is a 20% chance that inflationary pressures will become more permanent, rather than temporary. “Since 2008, The risk of a sharp rise in inflation has not existed, but now the situation has changed.”
If the Fed and the bond market’s judgment on inflation are wrong, it will mean that the decision makers may have to end the large-scale bond purchase program and raise the benchmark interest rate faster than it and investors expected.
Although the market generally expects inflation-adjusted US bond yields to weaken, the failure of gold to strengthen further in recent days indicates that investors are beginning to be cautious about this. There is a possibility that the Fed’s attitude may unexpectedly turn to the eagle, and it will at least temporarily suppress the price of gold.
Spot gold material drops to $1,841
On the daily line, spot gold is in the downward c wave that started from $1,903, fell below the 61.8% target level, and is expected to drop to the 100% target level of $1,841. Wave c is a sub-wave of the downward (4) wave that started at $1917.