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Gold Prices Fall as Fed Balance Sheet Hits $8 Trillion, Reverse Repo Surges

Gold Prices Fall as Fed Balance Sheet Hits $8 Trillion, Reverse Repo Surges

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices pulled back for a second day as the DXY US Dollar strengthened
  • Demand for Fed’s reverse repo facility surged to an all-time high, hinting at excessive liquidity conditions that support the case for tapering
  • The Fed balance sheet hit a record $8 trillion. A slowdown in the pace of expansion may undermine the yellow metal

Gold prices extended lower during Monday’s APAC session after falling 1.14% on Friday, as the US Dollar climbed alongside longer-dated Treasury yields. Demand for the Fed’s overnight reverse repo facility (ON RRP) surged to a record high of $547.8 million on June 11th (chart below), reflecting swelling liquidity at financial institutions. A reverse repo happens when a central bank sells securities and raises cash from the markets in order to provide stability in lending flows. It usually happens when there is too much liquidity (cash) and demand for interest-bearing securities rises.

This may reignite fears about the Fed tapering stimulus as it appears that the markets have sufficient liquidity to warrant a gradual withdrawal of its monthly bond purchasing program. Investors will scrutinize this week’s FOMC meeting for clues about the central bank’s view of recent economic developments, inflation, as well as ample liquidity conditions.

Looking back to 2013, two years of active reverse repo operations were followed by the Fed’s first interest rate hike after the global financial crisis (GFC) in the end of 2015. This observation strengthens the case of a 2023 interest rate hike if liquidity remains ample. As a result, the DXY US Dollar index rebounded to a one-month high of 90.56, undermining precious metal prices.

Recent comments from Treasury Secretary Janet Yellen also appears to be bolstering the US Dollar and weighing on precious metal prices. She said that a “slightly higher” interest rate environment would be a “plus” for the US and the Fed. This strengthened the reflation outlook while echoing several Fed officials’ comments about starting a tapering debate.

Demand for Fed’s Reverse Repo Facility Hit a Record on June 11th

Gold Prices Fall as Fed Balance Sheet Hits $8 Trillion, Reverse Repo Surges

Source: Bloomberg, DailyFX

Meanwhile, the Federal Reserve’s balance sheet surpassed the $8 trillion mark last week, as the Fed carried out unprecedented monetary stimulus to heal the economy from the pandemic. Continuous expansion of the Fed’s holdings may support the price of gold, whereas a slowdown in the pace of asset purchases may result in the opposite.

Gold Price vs. Fed Reserve Balance Sheet – 2012-2021

Gold Prices Fall as Fed Balance Sheet Hits $8 Trillion, Reverse Repo Surges

Source: Bloomberg, DailyFX

Gold Price Technical Analysis

Technically, gold prices breached below the floor of an “Ascending Channel”, potentially leading to a bearish trend reversal. Prices also broke a “Wedge” pattern, hinting at further losses with an eye on $1,828 (38.3% Fibonacci retracement) for support.The MACD indicator formed a bearish crossover and trended lower, suggesting that bullish momentum may be fading and a technical pullback may follow on.

Gold PriceDaily Chart

Gold Prices Fall as Fed Balance Sheet Hits $8 Trillion, Reverse Repo Surges

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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