What's a Tea! Fed Policy Expectations Plunge Gold to Key Support

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Gold declined marginally by 3% in September hitting its major support of 52 weeks SMA, in the face of higher long term Treasury yields and a stronger Dollar index .
Sentiment remained weak for most of the month as ETFs continued to lose AUM while COMEX managed money net long futures positions fell to a five month low previously in August 2023.

👉 Since July, long-dated yields have risen faster than short-dated yields, meaning the yield curve is exhibiting a "bear steepening", something often seen during a reflationary or early business cycle period.
👉 Following this thesis, lets compare 13-Weeks Treasury Bills Yield that jumped in 3 months from 5.150 to 5.330 only, and 10-Years Treasury Notes Yield with gains from 3.820 to 4.630 at the same time.
👉 While gold tends to underperform risk assets during these periods, it is not common to see bear steepening this late in the business cycle and recent moves in yields may be masking other factors at play, such as higher risk premiums
👉 Soft US economic data suggests also that a slowdown is still likely, which, alongside a potential change in the shape of the yield curve, could signal an environment where gold has historically performed well.

Yields take center stage

👉 August and September were challenging for gold. After dipping below US$1,900/oz, it staged a late recovery – around the Fed’s Jackson Hole annual symposium, than turned more down after Fed's September Meeting to finish September down approximately by 3 per cent.
👉 The US Treasury yield curve is arguably the most important financial indicator around, and its trajectory and shape are constantly under scrutiny. Most of the time (90%) it slopes upward as investors need to be compensated for lending their money for longer. But at these times, it inverts. As it has since July 2022, suggesting bond market participants are waiting Fed's monetary policy tightening continuation.

Lets Compare

Gold Spot in U.S. Dollars (RHS) vs. 6-Months Fed's Policy Expectations based on Jun'24 30-Days Federal Funds Futures ZQM2024 (LHS)

Gold Spot in U.S. Dollars (RHS) vs. 12-Months Fed's Policy Expectations based on Dec'24 30-Days Federal Funds Futures ZQZ2024 (LHS)

What’s next

👉 In summary, the move in the 10-year yield can likely be attributed to three main factors. A shift up in the ‘higher interest rates for longer’ narrative, supply and demand forces and a rise in the risk premium.
👉 The latter factor might start to provide support to gold prices, if it continues to increase from its key support of 52W SMA.
👉 If we simply look at bear steepening, gold tends to underperform – with low single digit average returns. Historically, the most likely successor to a bear steepening is a bull flattening (approx. a third of the time). This is characterized by a fall in the long end of the curve relative to the short end, effectively an unwinding of the rising premia we’ve witnessed.
👉 This partly took place at the latter end of September with gold likely benefitting from such yield declines. Also, soft data continue to suggest that a slowdown is still firmly on the cards. This could result in either a bull steepening or a rare "bear-". Both phases have on average been gold friendly, yielding an annualized return of 15% – the highest of all the phases.

Gold Market Breath

👉 What is Market Breath overall?
👉 Market Breath is a Percentage of Index Components Trading Above their N-Period Moving Average.
👉 Traders can use this index to see what percentage of index components are trading above their N-period moving average, for example, above the 200-day moving average.
👉 A rise above 50% in the indicator indicates increased market strength, while like the index of new highs and lows, traders and investors often look for extreme values to find extreme overbought and oversold conditions in the broader market.
👉 Gold Market Breath Indicator (number of S&P/TSX Global Gold Index above 200-Day SMA) is at 2.43, that is one of the lowest multi year readings.

In conclusion, there are some reasonable considerations for further Gold spot purchases following the thesis that 52W SMA is a strong support for Gold in 2023, and further Fed's Policy expectations for upcoming 2024 are fully in the hands already.