Gold zeroes in on yield curve control after topping US$1,800
NEW YORK: Fresh from cracking US$1,800 an ounce, the global gold market wants to know what the Federal Reserve may do next to rescue the US economy, with minutes due yesterday that are expected to shed light on the central bank’s willingness to embrace yield curve control.
Futures held near the highest in more than eight years, with a focus on the central bank release and warnings about the coronavirus pandemic.
Pinning US yields down – if adopted – may aid bullion’s allure.
On the outbreak, Fed chair Jerome Powell stressed on Tuesday that getting the virus under control was vital, while disease expert Anthony Fauci said new US cases could spike.
Gold’s ascent in 2020 has been underpinned by aggressive central bank action to counter the pandemic’s economic fallout, with US real interest rates already negative.
The minutes of the Fed’s June 10 meeting may add detail on policy makers’ view on curve control, a strategy that involves using bond purchases to cap yields on certain maturities at a specific level.
“Yield curve control may be implemented in order to control or influence the yield and overall interest costs to the US Treasury of future bond issuance,” according to Peter Grosskopf, chief executive officer at Sprott Inc. “This is becoming increasingly important as deficits skyrocket.”
Just over half of the economists surveyed by Bloomberg said they anticipate the Fed will eventually set target yields for certain maturities of Treasury securities, with most saying an announcement could come in September.
Should curve control go global, it could spark a “buy everything” rally that ripples across credit, equities, gold and emerging markets.
Gold futures – which touched US$1,804 an ounce on Tuesday, the highest since November 2011 – were at US$1,802 in London.
Prices rose 13% in the three months to June 30 to cap seven quarters of gains, the best run since 2011. Spot gold was at US$1,784.62 an ounce.
Ahead of the minutes, bets that the Fed will implement curve control are showing up in the Treasury market.
Among the signs, yields on five-year notes sank to a record low on Tuesday.
To be sure, Sprott’s Grosskopf said control of yields may in effect be here already.
With Treasury markets so controlled by the Fed, market-based price discovery has been “crowded out” by US central bank buying, he said .
“Bonds offer almost no real yield and have therefore become cash-parking assets,” said Grosskopf.
“In this situation, gold becomes a much more attractive asset as a hedge to other markets and store of purchasing power.”
Among other main precious metals, spot silver rose 0.2%, platinum added 0.2%, while palladium declined 0.9%.