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Updated: 02:22 23/10/21

Market volatility as Treasury Secretary suggests rate rises needed

By Michael Pinson, News Editor

05 May 2021

Precious metal prices are volatile this week, as gold and silver saw price pressure yesterday after nearing two-month highs. The price pressure came as Treasury Secretary Janet Yellen suggested that interest rate increases may be needed to keep the US economy from overheating following a year of fiscal stimulus and upcoming spending plans from President Biden.

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050521 USD Gold Chart.

Gold climbed to $1,799.28 per ounce yesterday afternoon, bumping against the $1,800 barrier that is proving a key resistance mark for the metal in recent weeks. Silver meanwhile passed $27 per ounce, reaching $27.13 per ounce at its peak before both metals fell on Yellen’s comments.

Speaking at a webinar, the Treasury Secretary said, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat.” The comments surprised markets as they contrasted starkly with statements from the Federal Reserve and its Chairman Jerome Powell, who say that interest rates will remain low for some time yet.

The comments from Yellen sparked a small sell-off in stock markets, with the Nasdaq dropping 2.6% and the European Stoxx 600 falling 1.5%. Gold and silver at the same time also saw the steady gains of Monday and Tuesday reversed, and are today trading closer to levels seen for the past few weeks. Gold is down to $1,777.55 per ounce, with silver at $26.29 per ounce though there still seems to be some range.

Yellen later clarified that she was simply speculating, and not suggesting interest rates will be rising in the near future. Whether her comments were genuine clarification, or a quick about-turn following the market reaction to the remark is uncertain, but markets appear reassured and have calmed today. The FTSE 100 has regained 1.2% today, while the Stoxx 600 has performed similarly, up 1.3%

While the initial statement caught markets off guard, many analysts agree with Yellen’s opinions. With so much money pumped into the US economy, the risks of overheating are only growing. While official core inflation figures suggest things are in control, there have been concerning signs of rising prices, with items like lumber in the US soaring to record highs. The combination of ‘easy money’, pent-up demand, and supply shortages are making a perfect storm for inflation.

That the mere suggestion of raising interest rates caused such a sell-off for stock markets gives an indication of just how fragile the market is, and what could happen as and when the Federal Reserve is forced to raise interest rates.

For now, the $1,800 mark has once again proven a barrier for gold, but as the year progresses there could be more volatility to come as inflation fears rise further, and then become accepted as a genuine problem. At this point, gold could begin to rise rapidly as investors turn to precious metals to hedge against what could become significant inflation in 2021 and beyond.

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