Higher yields on US bonds combined with dollar strength take gold lower

Gold futures had a double-digit price decline today with the most active December futures contract giving up $17.80 or 0.92%. As of 4:57 PM EDT gold futures are currently fixed at $1918.90 after opening this morning at $1935.10. Gold traded to a high of $1935.50 just $0.40 above its open, and a low of $1917.20.

The dollar continues its strong and vibrant rally gaining 0.23% today taking the dollar index to 105.93.

The rise in treasury yields as well as the dollar is predicated on the belief that the Federal Reserve will continue to keep current elevated rates for a longer time with a high likelihood of having one more rate hike of ¼% this year. The Fed is resolute in reducing inflation to its 2% target.

Chairman Powell in his speech during last week’s press conference was adamant that the Fed will continue to maintain elevated rates for a longer time with a single-minded goal of taking inflation to its 2% target. 12 of the 19 voting members at last week’s FOMC meeting want to raise rates by ¼% this year, with the remaining 7 members voting to maintain Fed funds at their current level.

This is coming in at an exceedingly high price, with the Federal Reserve sustaining large operating losses which now are more than $100 billion. According to The Hill, “the Fed’s losses will continue accumulating at about $2.5 billion per week as long as interest rates remain at current levels.  By Sept. 30, the end of the 2023 federal fiscal year, the Fed will have spent about $110 billion to cover cash losses — about $9 billion in operating expenses and a bit more than $100 billion in net interest expense.”

According to Bankrate, “Officials signaled in those updated projections that they see one more rate hike this year, a move that would bring the Fed’s key rate to a new target range of 5.5-5.75 percent. They also now see just half a percentage point worth of cuts in 2024 on the expectation that inflation and economic growth will gradually slow. Those estimates signal policymakers are prepared to keep rates higher for longer. Just last quarter, officials expected to cut rates by a full percentage point.”

On Wednesday, September 20, the US dollar index was fixed at approximately 104.78 today the dollar closed at 105.93. That is a net gain of 1.2% since last week's FOMC meeting concluded. The United States 30-year government bond was yielding approximately 4.46% last week and is now yielding 4.684%. Yields on the 20-year government bond have also risen and traded to a high of 4.861% this afternoon. It is headed for its highest closing level since the treasury introduced the bond in May 2020 as reported by MarketWatch.

As long as the Federal Reserve maintains its extremely restrictive monetary policy of keeping interest rates at their elevated level gold will be pressured to trade lower or at best be range-bound. Gold prices cannot gain traction as long as market participants believe that interest rates will continue to rise and remain elevated. One key element from last week’s dot plot was that the Federal Reserve plans on only cutting rates by ¼% twice in 2024 rather than cutting rates by a full percentage point as suggested in the previous dot plot.

Wishing you as always good trading,