- Spot gold dropped as low as $1810 on Monday amid a hawkish reaction to the new of Powell’s renomination.
- Prices have since recovered a tad to the $1820 area, but remain capped by the 21DMA.
Spot gold (XAU/USD) saw a sharp sell-off on Monday, with prices slumping from the $1840 region to print session lows just above $1810, before recovering back to around $1820. The drop was triggered by news of Fed Chair Jerome Powell’s reappointment for a second term as Fed Chair. At present, spot gold trades with on the day losses of about 1.8% and is now under its 21-day moving average (which resides at $1822) again for the first time since 4 November. This level will now act as resistance and, with the US dollar strengthening and US bond yields surging, gold bears will likely eye a move towards the $1800 level and a test of the 200 and 50DMAs which sit just below its either side of $1790.
Hawkish bond market reaction
US bond markets reacted hawkishly to the news of Fed Chair Jerome Powell’s renomination for a second term as Fed Chair. This is not so much because Powell is viewed as a hawk, but more so because Lael Brainard, who was the main alternative contender for the position, is seen as much more dovish than Powell. A Fed headed by Brainard would essentially be expected to keep rates lower for longer, so the hawkish market reaction is mostly about pricing out this dovish risk.
The 2-year yield rose as much as 6bps to its highest levels since March 2020 above 0.55%, the 5-year rose as much as 8bps to its highest levels since February 2020 at close to 1.30% and the 10-year rose over 5bps to just under 1.60%. But at the same time as nominal US bond yields have moved higher, inflation expectations have also fallen, a reflection of greater confidence in a Powell-led Fed’s ability to fulfill its inflation mandate in the medium-term. 5-year breakeven inflation expectations dropped back about 5bps to close 3.0%, while 10-year breakevens fell by a similar amount to under 2.60% for the first time since 10 November.
The rise in US nominal yields despite a drop in inflation expectations can be explained by a sharp rise in US real yields. The 5-year TIPS yield rallied by over 12bps to close to -1.70%, while the 10-year TIPS yield was up 10bps to close to -1.0%, a reflection of a market keen to unload inflation protection. That eagerness to unload inflation protection in part explains the drop in gold which is seen by many investors as an effective long-term inflation hedge. But higher bond yields also weigh on gold in that a rise in real yields increases the opportunity cost of holding non-yielding precious metals, which explains gold’s typically negative correlation to real yields.
The hawkish market reaction also, unsurprisingly, boosted the US dollar, with the DXY hitting fresh year-to-date highs just shy of the 96.50 mark. This makes dollar-denominated gold more expensive to purchase for the holders of other currencies, thus reducing demand via the exchange rate avenue.