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(Kitco News) – Spring must be coming because the golden bears are coming out of hibernation. It was another difficult week for the precious metal, as the price failed to stay at $ 1,750 an ounce.
The lackluster price action is having an impact on market sentiment as more banks begin to cut their bullish forecasts for the year. Commerzbank’s precious metals analysts started the week by saying that they see gold prices reaching just $ 2,000 an ounce this year, below their initial target of $ 2,300 an ounce.
On Thursday, Goldman Sachs did the same, as it also lowered its gold forecast to $ 2,000 compared to the previous target of $ 2,300 for 12 months.
For both banks, the biggest obstacle to gold remains the significant securities settlement, which is driving bond yields higher. Yield on 10-year banknotes continues to rise rapidly, exceeding 1.6%, reaching a new one-year record. Although yields are still relatively low, they are markedly higher compared to 0.5% seen just six months ago.
The question that arises on the market is to what extent the Federal Reserve can allow bond yields to increase. Unfortunately, investors got no real response from Federal Reserve Chairman Jerome Powell, who spent two days testifying before Congress. Powell was quite evasive when it came to providing specific answers to politicians.
Speaking of bond yields, Powell simply noted that the market was pricing for a more robust and complete economic recovery because of government and central bank stimulus measures to support the economy. Instead of talking about any specific action, he reiterated that the central bank would maintain its ultra-accommodative monetary policies “for a while”.
Not only did Powell show little concern about rising bond yields, he also remained quite complacent about inflation. With everyone focused on the resumption of economic activity in the United States, they are ignoring the growing threat of inflation.
However, more and more investors are raising their own concerns. Michael Burry – the investor whose profile was described in Michael Lewis’ book “The Big Short” on the mortgage crisis and who now heads Scion Asset Management, sent an inflation alert on Twitter.
“The US government is encouraging inflation with its dyed MMT policies. Brisk Debt / GDP, M2 increases while retail sales, PMI stage V recovery. Trillions of stimulus and reopening to boost demand according to employee costs and supply chain fire “tweeted on Saturday, before Powell’s testimony.
But it’s not all bad news for the gold market. Although the yellow metal is struggling to find a new bullish momentum, some analysts note that the recent price action is a sign of resilient strength. Bond yields are at most a year, but gold is able to maintain support at its June lows.
“The reason we don’t see a gold stampede is because some people think the bond sale has been overblown, or maybe inflation will be more than anticipated,” said Axel Merk, president and chief investment officer, Merk Investments.
As for how high bond yields can go, Merk said he thinks the liquidation is a bit exaggerated, but the momentum in the market could push yields to 2%.
Therefore, gold investors can expect to see some turbulent waters in the short term; however, I would like to highlight one last thing. Even as banks begin to cut their high gold price targets, they remain optimistic about the precious metal in the long run.
The reality is that central banks and governments around the world continue to inject massive liquidity into financial markets. We have no idea how this will affect long-term inflationary pressures.
Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes. It is not a request to make any exchange of goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article are not responsible for losses and / or damages arising from the use of this publication.