Gold Rebounds Amid Positive Economic Reports

Several economic indicators have surprised us on the positive side. Nevertheless, the price of gold has rebounded.

Finally! The price of gold has been rising recently. As the chart below shows, the yellow metal rebounded from the late March bottom of $1,684 to above $1,770 on Friday (Mar. 16). This could be a promising start to the second quarter of 2021, which looks better than the first.

Gold

As you know, gold struggled at the beginning of the year, falling under strong downward pressure created by the improving risk appetite and rising bond yields. But the strength of these factors has begun to fade. You see, it seems that economic confidence has reached its maximum level, and it could be difficult for markets to become even more euphoric.

Please take a look at the chart below which shows the level of credit spreads – as you can see, they have fallen to very low levels, which implies that they won’t get much lower than they are right now. So, it appears that the next big move will rather be a rise in credit spreads or a decline in economic confidence.

ICE

Second, it seems that the rally in bond yields has run out of fuel, at least for a while. The U.S. long-term real interest rates reached their peak of minus 0.56% on March 18 of this year. Since then, they are in a sideways or even downward trend, declining to almost -0.70% last week, as you can see in the chart below.

FED

As I explained earlier several times, the markets didn’t buy the Fed’s story of allowing inflation to rise substantially without hiking interest rates for several weeks or even months. However, it seems that Powell and his colleagues have finally managed to convince investors that they are really serious about the new framework, which puts full employment over inflation.

Of course, there are also positive geopolitical factors contributing to the rebound in gold prices. The tensions between the U.S. and China, as well as the U.S. and Russia, have been rising recently. However, it seems that the decline in bond yields allowed gold to catch its breath and that the macroeconomic outlook – including the credit spreads, interest rates, inflation, monetary policy, and fiscal policy – will remain the key driver of gold prices throughout the year.

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