(Kitco News) - The Federal Reserve has started its two-day monetary policy meeting, and it comes at a time as interest rates rebound from the March lows.
Ole Hansen, head of commodity strategy at Saxo Bank, said that gold prices stand on a knife’s edge as focus shifts to bond yields. Currently the yield on 10-year bonds is around 82 basis points, down from the June 1 high but up significantly from the March lows.
Hansen said that with the rise in bond yields questions are beginning to be asked about the possibility of the Federal Reserve controlling the yield curve.
“A decision to introduce yield caps on maturities out to five- or perhaps even ten-years could be an important next step for risk assets, the dollar and not least, gold,” Hansen said.
However, he added: “Any hesitancy from the Fed tomorrow, on the other hand, could mean that risky assets have over-shot their potential for now and see a steep correction in risk assets in the near term and a back-up in the US dollar.”
Hansen noted that yield curve control from the Federal Reserve would be a game changer for gold. He added that this move by the U.S. central bank could be the trigger gold needs to break out of its current range.
Hansen noted that with yield-curve control the Federal Reserve would basically lock in a nominal yield for a specific maturity and would step in to buy those bonds if its yield-target was reached.
“Such a development would make fixed income investments utter useless as a safe haven asset, especially into a period where inflation is expected to make a comeback,” he said.
Hansen added that the amount of stimulus central banks and governments are pumping into financial markets it is inevitable that inflation will pick up, dragging real interest rates lower.
In this environment gold will remain an attractive alternative, he said.
The comments come as gold price have managed to retrace most of their losses after recently falling to an eight-week low. August gold futures last traded at $1,722.80 an ounce, up 1% on the day.
Although Hansen said that he is bullish on gold in the long-term, he notes that prices are stuck and need a new catalyst.
“From a technical perspective a break above $1800/oz would be the trigger needed to send gold towards a new record high, thereby joining the multiple records already seen in other currencies so far this year,” he said.