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The price of gold is rising as the dollar and yields head to the Federal Reserve. Will XAU/USD recover? -by Ecork

Gold, XAU/USD, USD, Real Returns, Inflation – Talking Points

  • Gold manages to find some momentum as markets weigh the risks of a recession
  • The US dollar and yields are down, giving gold a boost for the time being
  • If the Fed raises as expected this week, it will XAU / US Dollar benefit?

Gold managed to rally towards the end of last week as the US dollar weakened. US nominal yields and US real yields also fell, which helped the price of gold.

Later this week, the Federal Reserve is expected to raise rates by 75 basis points based on pricing in the futures market and from Overnight Index Swaps (OIS) rates.

There appears to be a growing perception in the market that the Fed may have done enough front-loading to raise interest rates to get the job done to rein in “horrific” inflation.

While Treasury Secretary Janet Yellen played down the risks of a recession last week, the Fed experience he cited in the early 1980s suggests otherwise.

In that era, Federal Reserve Chairman Paul Volcker had the support of both the Carter and Reagan administrations to quell extremely high inflation. He did this by aggressively tightening monetary conditions and his tactics worked.

It was this experience that led many central banks to establish an asymmetric bias with their monetary policy framework. This tendency allows for high inflation risks in order to stimulate maximum sustainable growth.

Successful containment of inflation in the 1980s came at the cost of two recessions. The Fed was not able to cut inflation more than 2% without a recession. With that in mind, if the Fed has rates high enough if that happens, it will have some ammunition to stoke economic activity.

The market seems to come to this understanding when looking at the Treasury yield, particularly on the 2- to 10-year portion of the curve. Yields there fell 11-15 basis points on Friday.

Lower Treasury yields may erode US dollar weakness. Although this will also see potential risks outside the environment that would be supportive of the US dollar. This is the dilemma that appears to be creating a crossroads for markets in general and for gold prices.

Gold vs. US 10-Year Real Yield, US 10-Year Nominal Yield, US Dollar Index (DXY)

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— By Daniel McCarthy, Strategist for DailyFX.com

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