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Gold prices trying to hold $2,000 level as the Federal Reserve signals interest rates will remain in restrictive territory

The gold market is off its highs and struggling to hold above $2,000 an ounce as the Federal Reserve signals it will keep interest rates in restrictive territory for the foreseeable future.

According to the minutes from the central bank’s November monetary policy meeting, the Federal Reserve is maintaining a slight tightening bias. Although the Fed Funds rate is close to a peak, the central bank appears to be in no hurry to lower interest rates anytime soon.

“Participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time,” according to the Minutes. “All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks.”

The gold market is not seeing much reaction to the Fed’s elevated neutral stance. December gold futures last traded at $1,999.60 an ounce, up nearly 1% on the day.

Although the Federal Reserve is expecting to maintain higher interest rates for longer, the committee does see growing risks to the economy.

“Participants generally noted a high degree of uncertainty surrounding the economic outlook,” the minutes said.

Positive for the gold market, the central bank is also paying attention to bond yields as higher volatility has taken a toll on financial markets.

“Participants noted that in recent months, financial conditions had tightened significantly because of a substantial run-up in longer-term Treasury yields, among other factors,” the minutes said. “Participants generally viewed factors such as a fiscal outlook that suggested greater future supply of Treasury securities than previously thought and increased uncertainty about the economic and policy outlooks as likely having contributed to the rise in the term premiums. However, they also noted that, whatever the source of the rise in longer-term yields, persistent changes in financial conditions could have implications for the path of monetary policy and that it would therefore be important to continue to monitor market developments closely.”

The committee noted that over-leveraged hedge funds remain vulnerable to Treasury market volatility, which could force the central bank to step in to keep yields anchored.

“Several participants emphasized the need for banks to establish readiness to use Federal Reserve liquidity facilities and for the Federal Reserve to ensure its own readiness to provide liquidity during periods of stress,” the minutes said.

Several analysts have said that Fed intervention in the bond market to keep yields anchored could ignite a significant rally in gold. Many analysts have said that if the Fed starts pumping liquidity into the market, it will be seen as a new form of quantitative easing and potentially the first step in the long-term monetization of U.S. government debt.

Source: Kitco