Gold Holds Onto Gains as Inflation Expectations Rise

By Tom Luongo in Gold and Oil News | September 19, 2013 14:15 | Tags: , , ,

The massive move in Gold prices yesterday was really the sideshow to the main event of a reversal in U.S. Treasury prices.  The benchmark 10 year yield moved quickly down to 2.7% and traded lower than that for a while after stubbornly refusing to dip below 2.75% for most of the summer.  This is what the Fed wanted to accomplish with yesterday’s announcement.  But, that shock will quickly fade and the reality is that there is a lot of work to do to create a new intermediate uptrend in bond prices.

The key to that is rising inflation expectations as the breakeven rate rose yesterday to 2.2% and the goal here will be to get that back to 2.5% by hook or crook while at the same time keeping the 10 year note below a 2.75% yield, lest the housing data the Fed so cherishes degrades even further.  We saw how important that was in July where in the Japanese bought more than $55 billion in U.S. Treasuries to defend borrowing costs.

That said, the key now is that the Fed has handed Congress the money it needs to get down to serious non-negotiations and posturing over the debt ceiling and the budget.  I expect the status quo to be maintained and political capital to shift from one person to another.  At this point President Obama looks less like a lame duck and more like a flightless dodo.  But, don’t expect the Congressional Republicans to hold the line on the de-funding of Obamacare.  The Democrats’ future depends on that and will not budge.

Right now Gold is precariously placed below $1435 and will need to close above that on a weekly basis to bring the real momentum players back to the market.


About Tom Luongo
Tom is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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