The latest FOMC meeting has now come and gone. As expected, the Fed did not take any action today but rather attempted to outline its thought process and outlook going forward. Not only did the central bank leave rates unchanged, but it also forecast no rate hikes through 2022.
Rates on long-term U.S. Treasury securities had been rising recently, as the stock market has continued its ascent from the lows seen in March. A further rise in treasury rates could potentially lead the Fed to take more drastic actions, including the implementation of a yield curve cap. Some analysts have suggested that if the yield of the 30-year treasury bond climbs to higher than two percent, Fed Chief Powell and the central bank could get aggressive with rate control measures.
The stock markets have rallied hard from the March lows, with gains of over 40 percent since that time. This week has not only seen the Nasdaq reach 10,000 for the first time ever but has also seen the broad market S&P 500 recover its 2020 losses. How much higher stocks may go is the topic of significant debate, with some analysts now believing that fresh all-time highs are around the corner while others maintain that equity markets will stall out and make fresh lows below those seen in March.
Whether the Fed decides to implement additional yield-curve controls or not, the combination of ultra-low interest rates with uncapped QE may keep the U.S. Dollar under pressure. The greenback has lost significant ground since it reached a pandemic high in March around 104 and it is currently sitting just under the 96 level. A move below the March 2020 lows around 94.5 on a closing basis could set the stage for a significant decline that could see the dollar index move towards the 93 and then 90 levels. A weaker dollar is considered to be bullish for gold and hard assets. Because gold is dollar-denominated, it becomes less expensive for foreign buyers when the dollar is weaker. The relationship between gold and the dollar is often quite strong, and the inverse price nature of it can, but rarely changes.
The Fed’s commentary today fueled a spike higher in gold prices, which took them from negative into positive territory. The yellow metal is now firmly back above the key $1700 level, which could draw further buying interest into the marketplace. If equity market weakness is seen in the days or weeks ahead, it appears that the gold bulls would be likely to challenge the $1800 region in short order. A move above $1800 would almost certainly set the table for a test of previous all-time highs near $2000 per ounce. A break above previous all-time highs could see the yellow metal stage a remarkable run higher, with no upside chart resistance in place to put the brakes on a major rally.