LAWRENCE WILLIAMS: Powell under pressure. Gold dips again.
The final few days of November and the opening one of December have been turbulent ones for the gold price which has seen some pretty wild swings. This was led by a statement last Friday from acknowledged Fed ‘hawk’, Christopher Waller, which advocated a speeding up of the proposed U.S. Federal Reserve (Fed) tapering programme and a possible bringing forward of Federal Fund interest rate rises. This generated strong media coverage in the U.S. and led to the gold price being marked down from the $1,860s, to which it had just recovered, to around $1,780.
No sooner had the gold price started to recover some of its new lost ground on Monday, this was followed by news of President Biden re-nominating Jerome Powell for a new 4-year term as Fed chair. Somewhat surprisingly in our view this knocked the gold price back to the low $1,780s again despite Powell’s previous leadership which had guided the Fed on a somewhat ‘dovish’ path. Powell was always the favourite for Biden’s seal of approval, so the adverse reaction could be described as unexpected.
This may have resulted from the most likely alternative contender for the position, Lael Brainard, being passed over, but nominated as vice chair. Brainard was considered to be more ‘dovish’ than Powell – indeed she was regarded as having some near socialist views and socialism is still a dirty word across most of the U.S. political spectrum. Thus President Biden perhaps took the most politically expedient path, despite Powell having been a Trump appointee and a Republican. He had always followed his own path regarding Fed policy, though, which had often put him at loggerheads with the former President.
The nomination of Brainard to the Fed’s No. 2 position might just about satisfy her supporters, mostly on the left wing of the Democratic party, as it puts her in position to lead the Fed at the end of Powell’s next term. But this is still just over four years hence and much can happen in the meantime to make a Brainard succession somewhat less of a certainty.
Then news of the recognition of the new Omicron virus mutation, and fears about its global spread, gave the gold price a strong upwards kick, taking it back to well over $1,800 again. But it never rains but it pours! This upwards gold price recovery was quickly stopped in its tracks with a statement from Powell to the U.S. Senate Banking Committee which was considered almost ‘hawkish’ in content. I suppose in terms of Fedspeak it might be considered so, but all it seemed to do was confirm that the timing of the Fed’s proposed tapering programme would be a discussion point at the next FOMC meeting in a couple of weeks’ time. In our view it would be surprising if this were not the case, with or without Powell’s confirmation that this would be so.
Looking more rationally from a distance at the statements and news which appears to have inflicted such wild fluctuations in precious metals prices, we are of the opinion that most of the price movements were totally unjustified. Waller’s views and the re-nomination of Powell were both totally predictable, while the subsequent Powell statement that the Fed would look at the speed of the tapering programme was, in our opinion, just stating the obvious. Powell also suggested that high and persistent inflation levels should no longer be seen as ‘transitory’ – but again this was probably patently clear to any serious commentator or observer of current economic trends.
Perhaps the only real precious metal price mover should have been the news of the Omicron virus mutation. But it is yet too early to know how serious the effects of the new virus variant are likely to be so maybe judgement should yet be delayed on its likely economic effects.
Perhaps we should not expect U.S. markets to move in any ‘rational’ manner anyway. In a land where countless millions are happy to embrace totally outlandish conspiracy theories as fact, egged on by social media, what should be considered ‘rational’ investment behaviour any more? We do think that there are enough rational commentators out there to influence opinion in a more considered manner. Thus, the whole while that the coronavirus, and its seemingly continuous mutations impact economies then we suspect safe haven assets like gold will thrive. The path may not be a smooth one given the data-driven propensity of price movements, but overall we feel the only way for gold is up – at least in the medium to long term.