Are Powell’s comments enough to kickstart September gold price rally?

(Kitco News) A dovish speech by the Federal Reserve Chair Jerome Powell triggered a rally in gold. But is it enough to push the precious metal out of its trading range?

Gold saw immediate gains following Powell’s speech at the Jackson Hole Economic Policy Symposium. December Comex gold futures jumped more than $25 on the day and last traded at $1,820.70 an ounce.

Powell sounded more cautious than other Fed officials when talking about tapering, stating that the central bank could start reducing its $120 billion in monthly bond purchases this year.

“At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said. “For now, I believe that policy is well-positioned. My view is that the ‘substantial further progress’ test has been met for inflation. There has also been clear progress toward maximum employment.”

The gold market was not disappointed with Powell’s comments, RJO Futures senior market strategist Frank Cholly told Kitco News.

“Much like equity markets, the gold market likes to see a continuation of easy money. I would hope that at some point, we would begin to normalize rates, and gold will be willing to embrace it at that time,” Cholly said. “Right now, gold still remains mostly contained to a range. We are at the high-end of that range.”

Cholly noted that next week’s price action would tell investors whether Powell’s comments were enough to get gold out of the $1,780-$1,810 trading range it has been stuck in recently.

“Until gold is able to break out and get able $1,820-25, I am not convinced that it won’t fall back to $1,750-$1,720 because of that sharp selloff that we had in early August. The precious metal had a good recovery, and now it is waiting for some directions. Was Powell’s statement enough to get us above $1,820?” Cholly asked.

The gold market will pay close attention to how the U.S. dollar trades next week, especially after a quick selloff on Friday helped boost gold prices higher.

Cholly added that he wouldn’t be surprised to see a pullback in gold at these levels, citing the Fed’s September monetary policy meeting, during which tapering will once again be center stage. “If $1,775 is taken out, we can go to $1,750-20 relatively easy and could retest the $1,678 low,” Cholly said.

MKS PAMP GROUP head of metals strategy Nicky Shiels also said she doesn’t see Powell’s speech as a big enough catalyst to move gold significantly higher.

“The goldilocks dovish outcome should be great for equities, good for precious (as an equity inflation hedge), and in the short-term, precious prices should probe some upside targets, but this isn’t a catalyst that warrants a new range,” Shiels said. “2021 can be defined as a transition year (actual Fed easing but advertised Fed tightening), so the upcoming taper of its $120bn/mo bond-buying program (not matter how small or large), is still an overhang that doesn’t ‘allow’ for gold to play offence… Unless market expectations of the Feds ability to control asset prices and inflation really changes.”

In his Jackson Hole speech, Powell also pointed out that the requirements for raising rates are a lot more stringent than for tapering bond purchases. If rates are kept lower for longer, this will work in favor of gold, TD Securities head of global strategy Bart Melek told Kitco News.

“Powell said he sees inflation as transitory and mainly driven by the durable goods sector and energy. He also sees the pandemic as being a factor in terms of supply-chain bottlenecks. As such, the Fed will taper, but there will be different criteria for tapering and raising rates,” Melek said.

And while the Fed doesn’t seem to be worried about inflation, the market might still be. “There could be a tug of war between what Powell thinks about inflation and what the market thinks. Some may believe the Fed could be behind the inflation curve,” Melek said.

Melek is bullish on gold for next week, adding that he is looking for prices to reach $1,830 an ounce level.

“The markets expected a tapering statement at Jackson Hole. And there wasn’t one. Gold can move higher. As the economy recovers, tapering is one thing, but that doesn’t mean the Fed will raise rates,” Melek added.

Data to watch

Next week’s macro data calendar is filled with important latest data.

The biggest release — August’s U.S. employment report — is scheduled for Friday. Market consensus calls are projecting for the U.S. economy to have added more than 700,000 positions.

Monday:
U.S. pending home sales

Tuesday:
U.S. House price index
CB consumer confidence

Wednesday:
ADP employment
ISM manufacturing PMI

Thursday:
Jobless claims

Friday:
U.S. nonfarm payrolls
ISM non-manufacturing PMI

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