Will Fed Hawks Peck Gold

1. Will Fed Hawks Peck Gold

2. Points To Be Covered Today:
• Fed’s Hawkish Turn Is Fundamentally Negative For Gold Prices
• Gold Prices In 2021
• What’s Next For Gold
• Gold Prices & Effective Federal Funds Rate
• Gold Investment Tools
• Gold Technical & Fundamental Overview
• XAU/USD Resistance And Support Level
• Technical Confluences Detector

3. Fed’s Hawkish Turn Is Fundamentally Negative For Gold
Prices.
• Although gold doesn’t have to suffer during the actual tightening cycle, the Fed’s hawkish
turn is fundamentally negative for gold prices.
• Oh no, my worst nightmare related to the precious metals has materialized. In the June
edition of the Gold Market Overview, I wrote:
• Of course, gold is not a perfect inflation hedge in the short term. If the interest rates
increase or the Fed tightens the monetary conditions in response to inflation, gold may
struggle.
• Actually, the start of normalization of the monetary policy could push gold downward, just
as it happened in 2011.
• And indeed, the Fed turned hawkish in June. The FOMC members started talking about
tapering quantitative easing, and at the same time the recent dot-plot revealed great
willingness among them to hike interest rates.
• And, in line with the prediction, gold prices plunged in response to the Fed’s hawkish
signals about possible normalization of the monetary policy.
• As the chart below shows, the London (P.M. Fix) price of gold declined from $1,895 to
$1,763 in June.

4. Gold Prices In 2021

5. What’s Next For Gold
• Now, the key question is:
• What’s next for gold?
• Was the June slide just a correction?
• An exaggerated reaction to the not-so-meaningful economic projections of the FOMC
members?
• After all, “they do not represent a Committee decision” and they “are not a great
forecaster of future rate moves”, as Powell reminded in the prepared remarks for his
press conference in June.
• But maybe it's the other way around? Did the Fed’s about-face mark the end of the bull
market in gold?
• Are we witnessing a replay of 2013, where expectations of the Fed’s tightening cycle and
higher interest rates (and later the taper tantrum) sent gold lower, pushing it into bears’
embrace?
• To find out, let’s check how gold behaved in the previous tightening cycles.
• As one can see in the chart below, the last tightening cycle of 2015-2019 wasn’t very
detrimental for the yellow metal; gold prices weren’t declining, they remained in the
sideways trend.

6. Gold Prices & Effective Federal Funds Rate

7. Gold Prices & Effective Federal Funds Rate - I
• Of course, the tightening created downward pressure on gold.
• We can see that its price started to rally when the normalization
ended, and it accelerated when the Fed turned dovish and started
the cycle of interest rate cuts.
• However, gold didn’t enter a bear market; it’s consoling news for all
gold bulls.
• Neither the tightening cycle of 2004-2006 was negative for gold
prices. On the contrary, the price of gold appreciated in that period.
• Interestingly, it was a period of rising inflation, as the chart below
shows. Similarly, the tightening cycle of the mid-1970s was
accompanied by accelerating CPI annual rates, and it was also a
positive period for gold.

8. Gold Prices & CPI Annual Rates

9. Gold Prices & CPI Annual Rates - I
• Hence, the upcoming tightening cycle doesn’t have to be bad for the yellow
metal. If it is accompanied by rising inflation, gold may rise in tandem with the federal
funds rate.
• So, it turns out that the key is not the actual changes in the Fed’s policy and interest
rates, but the expectations of these changes, which translate into the real interest
rates.
• Indeed, the chart below reveals a strong positive correlation between gold prices and
real interest rates. It shows that gold suffered not from the actual previous
tightening cycle, but from the expectations of the tightening cycle.
• As one can see in the chart, the yellow metal definitely entered a bear market in late
2012, just when the real interest rates bottomed out.
• And then, gold prices plunged in 2013 amid the taper tantrum, when the surprising
announcement of tapering of asset purchases by Ben Bernanke pushed the bond
yields much higher. Importantly, the actual tapering began a few months later, while
the first interest rate hike came only in December 2015.

10. Outlook For Gold
• So, what does this short review of the previous tightening cycles
imply for the gold market? Well, the good news is that gold
doesn’t have to suffer from the tightening cycle, especially if
higher inflation turns out to be more lasting than commonly believed.
• This is because the real interest rates will remain low. And, given the
increase in the public debt, Wall Street’s addiction to easy money,
and the Fed’s dovish bias, the upcoming tightening will probably be
less tight than the previous ones.
• However, I also have some bad news. First, it might be the case that
inflation and inflation expectations have already peaked in May,
while the real interest rates have reached the bottom.
• In this scenario, the outlook for gold is rather grim.

11. Gold Still Has More Room To Slide
• Second, although gold may be fine with the actual tightening
cycle, we are in the expectations phase.
• And what do I mean by that? Investors are betting that the Fed
will start tightening its monetary policy soon; for example, they
expect the official announcement on tapering as early as
September 2021. And the expectations are what matters.
• The Fed’s meeting in June could have been a mini taper-
tantrum, as it surprised investors, the bond yields rose, and the
price of gold plunged.
• So, if history is any guide, it seems that gold still has more
room to slide.

12. The Rising Tide Of Inflation
• While investors are all-in on the U.S. Federal Reserve’s (FED)
“transitory” narrative, the inflationary cauldron continues to boil.
• Case in point: the IHS Markit released its manufacturing PMI on Jul.
1 and the report read that “June PMI data from IHS Markit signaled
the joint-fastest improvement in the health of the U.S. manufacturing
sector on record.”
• Moreover, demand remained resilient:
• “New orders growth remained substantial in June, despite the rate of
expansion easing from May's historic high.
• The pace of increase was the second-fastest on record, with firms
continuing to note marked upturns in demand from both new and
existing clients.”

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14. Gold Technical Overview

15. Gold Technical Overview - I
• Gold price is fast approaching the previous day’s high at $1783, above which the bulls will
test powerful resistance around $1790.
• At the level, the SMA100 one-day, Fibonacci 23.6% one-month and Fibonacci 23.6% one-
week coincide.
• The confluence of the previous week’s high and the pivot point one-week R at $1796 will
be a tough nut to crack for the gold buyers.
• Meanwhile, the upside momentum will remain intact so long as gold price holds $1776,
which comprises a dense cluster of healthy support levels – SMA10 one-day, Fibonacci
61.8% one-week and SMA200 one-hour.
• A breach of the last would expose the Fibonacci 61.8% one-day at $1772.
• Further south, the intersection of the previous day’s low and pivot point one-day S1 at
$1767 could likely guard the downside.

16. Gold Fundamental Overview
• Gold price is advancing for the third straight day on the final trading day of this week, with all eyes
on the much-awaited US NFP data release to confirm the bullish reversal from two-month troughs
of $1751.
• The recovery in gold price is gaining traction despite the persistent strength in the US dollar against
its main peers.
• The Fed’s willingness to resort to monetary policy normalization has emerged as the main driver
behind the greenback’s surge.
• However, the US Treasury yields are on a losing spree, which has fuelled gold’s advance.
• Delta covid strain flareups have raised concerns over its impact on the global economic recovery,
boosting gold at the expense of the risk-sensitive assets.
• Gold’s fate now hinges on the US NFP data, which is likely to throw fresh hints on the Fed’s next
policy move.
• However, if the data disappoints just like the last time, gold price is likely to recapture $1800 while
the dollar reverses recent gains.

17. Gold Fundamental Overview - I

18. XAU/USD Resistance And Support Levels

19. Technical Confluences Detector
• The Technical Confluences Detector is showing that gold is facing resistance
at $1,783, which is the convergence of the previous daily high and the Fibonacci
38.2% one week.
• The second hurdle awaits at $1,790, which is the meeting point of the Fibonacci
23.6% one-month and the 100-day Simple Moving Average.
• Immediate support awaits at $1,780, which is the confluence of the Bollinger
Band 1h-Middle and the previous 4h-low.
• It is followed by $1,775, which is where the Fibonacci 61.8% one-week and the
SMA 10-one-day converge.

20. Will Fed Hawks Peck Gold

21. THANKS FOR LISTENING
Will Fed Hawks Peck Gold