After weeks of speculation, President Biden has chosen to re-appoint Jerome Powell as the chair of the US central bank, the Federal Reserve. This decision has caused heightened volatility through bond markets, forex and indices too. The moves have also shown through a sharp move lower on precious metals. However, we do not see these moves lasting as the changes at the Federal Reserve do little to impact the policy direction.
- Biden re-appoints Powell as chair and promotes dovish Brainard to vice-chair.
- Bond yields spike higher, real yields rise.
- Precious metals are pulled lower, but we see this as a chance to buy.
Biden re-appoints Powell
There had been some speculation over whether the incumbent Fed chair Powell would remain in his post. Criticisms against Powell include him presiding over an FOMC where members freely traded assets linked to QE purchases. Also, allowing looser banking regulations were an issue. This had led to some calls for a dovish Lael Brainard, who was seen as a progressive choice.
Biden has opted for continuity in sticking with Powell but also promoted Brainard to vice-chair. However, markets have reacted because the potential for a dovish Fed chair has been removed. Interestingly, the market has moved to bring forward rate hikes expectations
Bond markets react and expectations of hikes are pulled forward
Expectations for US interest rate rises have moved. The Eurodollar swaps rate (which reflects US interest rate futures) is now pricing in a first-rate hike in June/July 2022 and a second in Q4 2022.
Bond markets have also moved. The US 2 year Treasury yield has jumped by around +12 basis points (+0.12%) higher, whilst the longer-dated 10-year yield is around +8 basis points (+0.08%) higher.
Where shorter bond yields rise more than longer bond yields, this is known as a “bear flattening” of the yield curve. However, this is not especially positive, as if shorter-dated yields continue to rise whilst longer-dated struggle, then it suggests bond markets are worried about the longer-term implications for growth.
The increase in longer-dated yields has also increased “real” bond yields (bond yields minus inflation). This has come as nominal bond yields have risen but inflation expectations have slipped back in recent days. This is what has been the key driver behind US dollar moves and also commodities in the past 24 hours.
Precious metals lower on rising real yields
Precious metals such as gold, silver, and platinum have fallen sharply in the past 24 hours. This comes as real bond yields have moved higher. Precious metals continue to have a very strong negative correlation with real bond yields.
For gold, the correlation remains deeply negative. If real yields continue to rise, gold will continue to fall.
It is a very similar situation for silver too.
So, the issue becomes, the continued direction of real bond yields. We do not believe that this reaction to Biden’s decision will be long-lasting. Although real yields are up again today, the move is fairly contained. Financial markets will settle quickly now.
Pricing for a June/July hike already suggests an acceleration of the taper or an immediate hike after the current taper. Both seem fairly hawkish for now and may see limited traction in moving beyond this position from here. This may limit the move higher in real yields and therefore provide support for precious metals.
The technicals suggest key support is approaching
There is no doubting the momentum shift in the past 24 hours. Adrift lower has accelerated sharply on gold and silver. Breakout supports have been breached. However, if this is to be a near-term move, then we can expect the support to start to form around here.
For Gold (MT5 code: XAUUSD) the move below $1810 will be a disappointment, and under $1800 adds to this sense that the move could continue lower. The next key price support comes in around $1760/$1770, however, uptrend support is also around there too.
We see this move as a retracement within the recovery and with the Relative Strength Index around the low 40s, this is an area where the bulls will look to form support. Today’s reaction high is at $1812. A move above here would be a signal that buying pressure was resuming.
We see a fairly similar picture with Silver (MT5 code: XAGUSD). The retracement is now testing an uptrend recovery and the RSI is into the low 40s. This is an area where the bulls will be looking to gather themselves again. The key higher low is at $23.01 and needs to hold now.
However, we look to buy into weakness within this big recovery pattern for silver. Once the support develops we see this as a buying opportunity.