The rally began a day after the conclusion of the November FOMC meeting. They announced that they would start reducing their asset accumulation by $ 120 billion later in the month. They announced that they would have a monthly reduction totaling $ 15 billion and would continue the reduction until they were at net zero. At the same time, they have indicated together with the ECB and the Bank of England to maintain extremely accommodating interest rates.
The Federal Reserve actively provided liquidity to aid in the economic recovery that was the direct result of a global pandemic. The last massive accumulation of assets by the Federal Reserve dates back to the economic recovery after the recession of 2009, a direct consequence of the banking crisis in the United States. When “quantitative easing” first occurred, the net result of which was that the Federal Reserve had a balance sheet of about $ 4.5 trillion.
Around 2013, as it completed its phase-down process, the Federal Reserve began to shrink its balance sheet, reducing its assets to $ 3.7 trillion before stopping reducing its assets. At the time, they believed that a further reduction would have a detrimental effect on the economic recovery that had occurred.
However, compared to their asset accumulation during the recession of 2009, the Federal Reserve’s current quantitative easing strategy resulted in an asset balance sheet that swelled to $ 8.6 trillion. About double the size of their assets they accumulated in 2009. At the current rate of a monthly reduction of $ 15 billion, it will take them at least until June 2022 to complete the process.
While there is a lot of uncertainty as to when the Federal Reserve will begin to normalize rates and how quickly that rate normalization will take place, what is certain is that at some point, most likely. in 2022, but no later than 2023, they will begin the take-off process in which they will slowly climb the federal funds rate currently essentially at 0% back to normalized rates of around 2.5%.
The net result of massive asset purchases by the Federal Reserve coupled with significant government spending in terms of fiscal stimulus has seriously impacted the current inflation rate. While much of the current inflationary pressures are temporary, based on applied chain bottlenecks and labor shortages that have significantly hampered businesses to meet the high demand for goods and services . Collectively, these problems have taken the current inflation rate to a level not seen since November 2009, when the CPI inflation index was 6.2%.
The Federal Reserve let inflation soar instead of focusing on securing as many jobs as possible, half of its dual tenure. The other part of this dual mandate is to keep inflation rates around 2%. It was the skyrocketing inflation rate that was the main implication that pushed gold from $ 1,770 on November 4 to $ 1,880 on November 16. In other words, during the first two weeks of November, gold prices rose over $ 100 an ounce due to inflationary concerns. . However, researching gold prices only took five trading days, or a week before gold prices started to consolidate, which is happening now. Typically, after a commodity has seen a dynamic rally, there will either be a price correction or a price consolidation. The current consolidation in gold prices indicates that the precious yellow metal is potentially forming a base at this new upper level and awaiting the set of the next fundamental events.
In the last six trading days since November 11, we have had gold opened and closed within a set price range with the lows at $ 1,851 and the highest closing price that occurred yesterday. at $ 1,870.
The recent price increase of over $ 100 was a direct response to mounting inflationary pressures. However, higher inflation contains a double-edged sword as the Federal Reserve has one main tool in its toolbox for lowering inflation and that is to raise interest rates. Higher rates will push gold lower, making it difficult to predict the future price of gold.
Our current assessment is that if we can get an effective close for gold above $ 1880, it has a clear path to challenge $ 1900 and maybe even trade up to $ 1920, the highest reached in June. 2021. If the Federal Reserve raises rates immediately after the tapering concludes, we could see gold at this point come under significant pressure. However, this timeline still allows inflation to continue to rise and gold to gain value until at least June 2022.
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Wishing you, as always, good exchanges and good health,