Gold In Q1: Price Softens, But New Catalysts Emerge

All this and more brings a shift to the factors that could impact markets going forward. Here’s what we’re watching that will likely have the most effect on precious metals.

Interest Rates: The size of the U.S. stimulus packages is likely to continue to push global bond yields higher, at least in the short-term. And the Fed has made clear it will maintain an easy monetary policy; according to San Francisco Fed President Mary Daly, “We still have almost 10 million people on the sidelines looking for jobs… we really aren’t projecting achieving either side of our dual mandate in 2021 and that’s why policy is remaining accommodative.” 

A CNBC poll of over 100 chief investment officers, equity strategists, and portfolio managers showed that almost half cited rising interest rates as the #1 factor that could impact markets the most going forward. Over 60% believe the 10-year Treasury yield will exceed 2% by the end of 2021. Rising yields could dampen gold’s appeal, though the real interest rate is the bigger determinant.

Money supply growth hit another all-time high in February, the 11th consecutive month of remarkably high growth. The money supply grew 39.1% from a year ago, historically very large, the 1970s the only comparable period. Monetary dilution provides a strong incentive to hold monetary metals like gold and silver.

The US dollar hit a one-year high versus the yen and multi-month peaks against other currencies by quarter’s end. The dollar rose for the third consecutive month against the yen, its biggest ascent since the end of 2016. The dollar responded mostly to the surge in U.S. bond yields, currently at a one-year high.

In the bigger picture, I’ll point out that the global share of US-dollar-denominated reserves dropped to 59.0% in Q4 (IMF’s most recent data), its lowest level since 1995. The dollar’s share has dropped by a full 7 percentage points since 2014—if the current pace continued the dollar’s share would fall below 50% by the end of the decade. Precious metals prices are inversely correlated to the U.S. dollar and are thus excellent hedges against dollar weakness.

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