Gold prices collapsed yesterday due to a sharp surge in the US dollar. It is worth noting that the US currency grew after the White House nominated Jerome Powell for a second 4-year term as Fed chairman.
The culmination of Monday was the news about the possible re-election of Jerome Powell for a second term as chairman of the Federal Reserve System. His candidacy was supported by US President Joe Biden. Now, all that remains is to get Congressional approval.
The head of the American government also proposed appointing Lael Brainard as deputy chairman of the central bank. Many assumed that it was she, a supporter of a softer monetary policy, who could sit in the chair of J. Powell.
But since the former head remains at the helm of the Fed, investors felt that the prospect of accelerated tightening of the current rate of the regulator remains.
This means that the central bank will continue the reduction in bond purchases started this month, which will eventually lead to an increase in interest rates.
This scenario is like an anchor for the US dollar in the long term. However, it has reacted with rapid growth already now. After the announcement of a possible re-election of J. Powell for a new term, the US currency increased by 0.5% and thus approached the highest level since the summer of 2020.
Also on Monday, the yield of 10-year US Treasury bonds showed positive dynamics. The indicator rose to 1.62%, while it was 1.535% on Friday afternoon.
The strengthening of the US dollar and the growth of US bond yields have put strong downward pressure on gold. Yesterday, the price of bullion fell by $45.30, or 2.4%, showing the sharpest drop in three and a half months. The asset ended trading at $1,806.30, which is a 2-week low.
Experts pay attention to the fact that the quotes collapsed near the level of $ 1,835, which is considered a key threshold of technical support for the precious metal. This may have helped accelerate further price declines on Monday.
"I think that the news about Powell's re-election was just an excuse for short-term gold traders who wanted to make a profit after the recent good price growth. After all, the market as a whole expected that Powell would be reappointed as head of the Fed, and bullion should not have reacted the way they reacted" – analyst Jim Wyckoff commented on the situation.
At the same time, the expert stressed that gold still maintains a short-term upward trend despite the current decline. In his opinion, the metal will be in high demand in the future among investors as a hedge against increasing inflation.
Precious metals analyst Suki Cooper also expects the market to continue focusing on rising inflationary pressures and declining real bond yields. Against this background, the price of gold in the first quarter of 2022 may average $1,875, which is 3% higher than yesterday's close.
Based on his forecast, the expert believes that the latest drop in prices on the precious metal market may be an excellent opportunity to buy.
"Investors are concerned about the increased inflation risk, but at the same time do not believe that the central bank will immediately react in a hawkish manner to the acceleration of price growth. I think the Federal Reserve System will still not be in a hurry to raise interest rates, regardless of who is sitting at the head of its table." S. Cooper said.
The expert noted that gold continues to be one of the best defensive instruments against inflation and it may receive support this week from another batch of US economic data.
Investors are waiting for the publication of the price index of personal consumption expenditures. According to S. Cooper, the indicator for last month will grow by 4.2% year-on-year and reach the highest level since 1991.
