It was known by all economic circles that when the Federal Reserve began to withdraw stimulus and zero rates, the party could end or at least some guests were going to complain (the markets).
Well, that moment is getting closer and closer and this is what the Fed made known on Wednesday, January 5th in its minutes of the last monetary policy meeting: less debt purchases and higher interest rates to control inflation. The first result is in sight: stock markets stained red and debt interest rates rising sharply. An unexpected Epiphany gift for many investors.
The Federal Reserve (Fed) has published the minutes of its last meeting. The transcript of the December meeting shows that in order to control inflation, the central bank will accelerate the reduction of debt purchases, which is driving up interest rates on U.S. sovereign bonds, but also those of the rest of the world, as can be seen in Spanish and French bonds. Fewer bond purchases will mean less demand for a given supply (it will be elevated by fiscal deficits), which will be transformed into higher interest rates and higher funding costs.
In addition, minutes released Wednesday from the December meeting of the Federal Open Market Committee (FOMC) showed that officials were in full agreement with plans to accelerate the withdrawal of the massive bond-buying program adopted at the start of the pandemic
Aggressive rate hikes
On the other hand and what has spooked the market the most is the 'hawkish' tone with rate hikes: the earlier withdrawal of bond purchases will also give the Fed more room to raise interest rates earlier and more forcefully. The minutes noted that "the Fed may need to raise interest rates sooner or at a faster pace than officials had initially anticipated as the central bank seeks to control runaway inflation," according to the minutes of its last meeting.
The message from the minutes is clear: "The Fed is preparing to accelerate the withdrawal of monetary policy stimulus." Specifically, the minutes reveal that most committee members expect the U.S. economy to reach maximum employment "relatively soon." With employment peaking and inflation soaring the Fed has only one direction left to look: unchecked rate hikes.
Moreover, some officials see the possibility that a rate hike may be warranted before peak employment is reached, noting the risk of persistent inflationary pressures and the impact on inflation expectations.
"Participants noted that given their outlook for the economy, the labor market and inflation, it may be warranted to raise rates earlier or at a faster pace than previously anticipated," the minutes state.
So much so that markets have begun to anticipate a rate hike as early as March. If the script foreseen by interest rate futures is fulfilled, the Fed would bring the price of money to a place close to 1% by the end of this year that has just begun.
Bleak outlook for Gold
Many analysts thought that with the entry into force of Basel III this January 1st, 2022, bullion banks would have to reduce their holdings of short sales of "paper gold" and would have to close these operations with purchases that could push the price of Gold up to close to $2k.
Nothing could be further from the truth, as Gold has a high correlation with US Treasuries and a sample of this can be seen in the following chart, where we compare Gold (candlestick chart), with the ETF that tracks the behavior of 20 and 30 year bonds named TLT (blue line chart).
It can be seen how the rise in yields (lower bond prices) puts downward pressure on the price of Gold, placing it now around $1,790 per ounce, being extremely difficult to see a rebound to the $1,900 per ounce area since the Fed, as stated at the beginning of this Insight is being very aggressive with its intentions to raise rates this year, which takes away the attractiveness of Gold that does not generate returns to the investor to own it.
AXL Capital Management would even see current levels as good for accumulating Gold as it sees limited yields rising further, which translates into limited declines in the Gold price to areas around $1,740 per ounce, with that price range being advisable to accumulate Gold for the long term.
