US President Joe Biden’s announcement that Fed chair Jerome Powell will have his term extended, along with his decision to drop the use of the term “transitory” when speaking about the expected reduction in inflation pressures, are just the most vivid examples of how Fed policy expectations can drive the yellow metal’s price action.

Indeed, prices dropped more than $40/oz on the day, after the news that the more dovishly perceived candidate, Lael Brainard, was not nominated as Fed chair. Also, prices trended lower after the transitory reference received attention, as it was perceived as a hawkish signal. Mr Powell’s decision to speed up the rate of taper from $15 billion to $30 billion and his mention of removing some quantitative stimulus in the latest FOMC Minutes is another case in point on how hawkish policy perceptions worked against gold.

The market is pricing the start of tightening in late Q1, with the dot plots mapping out three 25 bps increases and a balance sheet reduction over the next twelve months. But while Mr Powell recently acknowledge that inflation will stay elevated and pledged to do what’s necessary to contain an inflation surge, he said he will only raise rates over time. This implies that a tightening may start early but be take a gentle form (4 hikes this year), which helped gold to move higher. Policy will respond to data and may turn on a time. Of course, inflationary pressure will need to start slowing down to remove any urgency to control rising prices.

A bonafide restrictive policy may not be in the cards for a while yet. Non-farm payrolls remain some 4 million below pre-Covid levels, participation rates are quite low in the US and the central bank’s policy continues to be skewed toward full employment, despite the hawkish tone. This suggests that the economy may run relatively hot too.

This, the possibility of weakish economic data in the aftermath of the Omicron variant and somewhat less inflationary pressure manifesting deeper into 2022 (as implied by the ISM manufacturing survey recently), along with the lack of strict inflation targeting (an attitude which perceives inflation as transitory, without specifically citing the word), are all factors likely to keep the US central bank from aggressively tightening, as many increasingly expects. This would suggest that there may well be a continuation of the recent short-covering rally in the first few months of the year, alongside long extensions.

Since real rates are likely to say negative despite the “tightening”, gold positioning should tilt in favor of long positions in early-2022, which would be a surprise to many in the market. A CTA fund and technical trader follow up may also materialize, helping this trend. This dynamic is consistent with the precedent for higher prices observed in the immediate pre-Volker era.