Special report: gold price peels lower as US dollar and Treasury yields gain

The gold price went lower after Federal Reserve presidents from four districts got the bull horn out and highlighted the need to rein in inflation. The messaging lifted Treasury yields, real yields and the US dollar, undermining XAU/USD.

The Fed hawks were Cleveland’s Loretta Mester, Chicago’s Charles Evans, San Francisco’s Mary Daly and renowned rate hike cheerleader, St. Louis’ James Bullard.

The united front appeared necessary to correct market assertions that the Fed had pivoted after last weeks Federal Open Market Committee (FOMC) meeting.

President Daly said that the Fed was nowhere near done that they “are resolute and completely united on achieving price stability.”

President Evans said that they were a couple of inflation reports away from confirmation that they are on the right track for monetary policy.

President Mester cited the tight labour market and she said that she would like to see very compelling evidence that price increases are moderating.

President Bullard highlighted the difference in this hiking cycle to the Volker episode from 40-years ago. He said that central banks now have a well understood approach to taming inflation and have more credibility in being able to achieve this with a soft landing.

Equity markets had rallied on that perception of a pivot. This aided corporate credit spreads to narrow, which is essentially an easing of monetary conditions. The exact opposite of what the Fed is trying to achieve.

The FOMC normally meet every 6-weeks or so. The next meeting isn’t until late September, which will be an 8-week gap since the July gathering, the largest in the calendar. Unable to take any action until then, jawboning is the next best thing.

Going forward, should markets get ahead of themselves and price in too much easing of policy, it is reasonable to expect similar types of commentary from Fed Presidents re-iterating that the tightening cycle is not over.

Depending on circumstances leading up to such verbal massaging, it may see USD supported on any dips, which could impact gold prices.

Gold against US ten-year real yield, US ten-year nominal yield, USD (DXY) index

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