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The Fed May Finally Be Ready To Pivot Soon

John Galt

Updated: November 27, 2022

fed pivot
Editor’s Note:

EDITOR'S NOTE: There’s been talk about a slowdown in the pace of rate hikes, even among Federal Reserve officials. These talks tend to lift market optimism and dampen gold bullishness as it forecasts a peak in inflation and a stabilization of the economy at large. But a slowdown in rate hikes is not the same as a Fed pivot, and on the flip side of the forecast for price stability is the likelihood of systemic risk. As bearish as the mainstream economic forecast stands for the yellow metal, gold remains a strong hedge for several risk factors, many of which seem to be lurking just right outside the gates of economic certainty.

(Kitco News) - The gold market continues to hold its own as prices end the week slightly above $1,750 an ounce. The precious metal was once again thrown a lifeline by the Federal Reserve after the minutes from the November monetary policy meeting were deemed to have a dovish tilt.

According to the minutes, a majority of participants judged that a slowing in the pace of increases would likely be appropriate soon. The messaging is helping to solidify expectations that the U.S. central bank will raise interest rates by 50 basis points next month.

Although the gold market is keeping its head above the water, holding critical support levels, investors still appear to be reluctant to make any significant bullish bets. The lack of conviction is not surprising, as other pivot rumors throughout the summer have burned investors.

While the Fed is preparing to slow the pace of its rate hikes, many market analysts have pointed out that this is not a pivot. Markets still see the terminal rate in the Fed Funds above 5% and nobody knows how long rates will be kept at this level.

This will still be a difficult environment for gold. However, even if prices are capped at around $1,800, it is still important to note that despite the strong headwinds, gold continues to outperform the broader market and remains an important portfolio diversifier.

The French bank Société Générale has probably the healthiest outlook on gold. The bank made some significant adjustments to its multi-asset portfolio ahead of the new year. It is now heavily weighted in bonds. At the same time, it has only made a slight adjustment to its gold allocation. It now represents 6% of its portfolio, down from 7%.

Although the bank sees gold prices going lower next year, they still see value in holding the precious metal.

"Systemic risks are a common feature after a round of policy tightening of this kind," the analysts said. "Holding gold and CHF can help stabilize portfolio volatility, in our view."

The system risks to the economy only continue to grow. This week Tavi Costa, portfolio manager at Crescat Capital, noted that 70% of the entire U.S. yield curve is now inverted. He added that every time this threshold has been breached, it has soon led to a recession.

Specifically, the yield on two-year notes is now 71 basis points higher than the 10-year yield. This is the widest gap in the inverted yield curve in more than 40 years.

Tavi noted that even if gold prices do go lower, there is solid value and potential in the precious metal that investors can't ignore.

With so much uncertainty in the marketplace, some analysts have said that it is only a matter of time before the Fed's slower tightening turns into outright cuts.

Originally published by Neils Christensen on Kitco News.

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