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LAWRIE WILLIAMS: Another freaky Friday for gold

The gold price had seemed to be taking off again in early trade on Friday.  Strong gains in European markets were initially followed by complementary rises in morning trade in the U.S. and it looked as if the gold price might be taking a substantial leg up.  Then Fed chair Jay Powell spoke and everything came crashing down again.  The gold price fell by over $30 an ounce to the low $1,780s before making a partial recovery and ending the week in the low $1,790s – up on the week but  somewhat disappointing for gold investors who  had been hoping for better things.

So what did Powell say that brought the gold price crashing down?  In effect he reiterated the Fed’s long held opinion that the high inflation levels that had been driving precious metals upwards were indeed ‘transitory’.  That would still mean that the Fed’s proposed tapering programme would not be interrupted, with the central bank reducing its bond buying activity from sometime in November.  The markets had already accepted this as a probability,  By definition that also appeared to suggest that rises in the Federal Funds interest rates remained on schedule and would likely start to be implemented, perhaps by mid-2022.

But there were both positives and negatives for gold in Powell’s statement, which was made in a presentation to an online virtual conference set up by the South African Reserve Bank (SARB) and the Bank for International Settlements (BIS).  Maybe the markets reacted, as they often tend to do, in a more exaggerated manner than the statement actually justified.  Although Powell suggested that inflation would come back down to around 2%, the markets were somewhat sceptical that this was likely, hence the partial recovery. And even Powell was prepared to admit that the inflation rate was perhaps higher than originally thought, and these higher levels might go on for longer, than the Fed had initially estimated.  But he did insist that his ‘maximum employment’ target was still on track to be achieved next year, despite some evidence to the contrary.

Once the economy reaches this ‘maximum employment’ target – the level at which unemployment had settled pre-pandemic – the Fed will probably feel free to raise interest rates to help control inflation regardless.  The central bank’s prime targets will have been met.  This is seen as a negative for gold, but may still be a long way off timewise, and is by no means a certainty.  Inflationary pressures are likely to continue for some time yet.  The only real question is will they get worse before they begin to get better and how long it may take for them to settle back to what the Fed considers as an ideal level?  Some sectors of the markets feel that the inflation rate moving higher before it starts to come down scenario is the more likely.  All eyes will thus be on data releases for the Consumer Price Index (CPI), the primary inflation measure for price rises affecting the general public.  The Fed, though, tends to relay on the Personal Consumption Expenditures (PCE) index as its preferred inflation measure and this tends to track at a lower level than the CPI.

Low interest rates for longer in the face of high(ish) inflation levels tend to be gold positive.  If the Fed has to concede that this is indeed the case, and delays interest rate increases into say 2023, then that could give the gold price a nice boost.  If the Fed proceeds as currently scheduled, then this could be a gold price dampener.  We still feel, without evidence to the contrary, that inflation is indeed running higher than the Fed is prepared to acknowledge and that the general gold price trend is thus likely to be upwards regardless.

23 Oct 2021 | Categories: Gold, FOMC

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