LAWRIE WILLIAMS: Another up and down day for gold
After the massive, and in our view totally unjustified, take-down of the gold price last week in response to a published statement from Fed board member hawk, Christopher Waller, and the reconfirmation as Fed chair of Jerome Powell, we did anticipate a bounce back upwards. Indeed this did happen in Asian and European trade on Friday, but then the price came crashing down again when American markets re-opened. Gold ended the week therefore back in the mid $1,780s after getting close to $1,820 in the European market at one time.
Friday’s upwards recovery in non-American markets for gold had been in response to fears about the new Omicron coronavirus variant in southern Africa, the possibility of its spread globally and uncertainty about its possible vaccine resistance. These fears impacted global equity prices and bitcoin which fell back sharply. These worries, though, were then shrugged off by the North Amercan precious metals markets despite the equity market downturn and a fall in the dollar index which had previously been trending higher on the Waller and Powell news.
Demonstrating the perceived seriousness of the new coronavirus variant, a number of countries, including the U.S. immediately imposed travel restrictions on flights from South Africa, Namibia, Botswana, Lesotho, Eswatini and Zimbabwe, while there were reports of the new virus variant having already been discovered in Europe. Given the anticipated increased northern hemisphere virus infection rises in the winter months, and the hugely increased infection rates from existing virus variants being seen anew in several European nations, there are huge worries about coronavirus-related further blows to the global economic recovery. We are already seeing increased infection rates beginning to appear again in the U.S. and with the propensity for rapid spread of new virus variants we could well see a return to heavier restrictions.
In the U.S., which is the prime mover in setting the global gold price, there are even views that the Fed might even welcome new coronavirus worries which could force its hand into drawing back from its running down of its QE programme, despite the equally worrying inflation rises being seen. There is a view that the Fed has painted itself into a corner over tapering and possible interest rate rises, and worries about the new virus variant might mean it may have an excuse to draw back from its latest proposed easing programme. This might well be necessary if it sees this as precipitating a domestic economic and equity market downturn – which may well be the case.
Coming back to the Fed, the most likely alternative option to reconfirming Powell would have been the appointment of Lael Brainard as the new Fed chair. As a Democrat she might have been seen as a good choice for President Biden, but she is probably too closely associated with the ‘socialist’ wing of the party to be confirmable. Powell, although a Republican and a Trump appointee, has been seen to have views that are probably more closely aligned to Biden’s own and those of his Treasury Secretary Janet Yellen, herself a former Fed chair.
If we are correct in our take on the likely moves by the Fed over the next month or so in response to the new virus threat, this could be very positive indeed for the gold price. The Fed might well delay the timing, or extent, of its tapering programme and maintain ultra-low interest rates for longer despite rising inflation. This would keep real interest rates in negative territory, which as we have pointed out before is extremely positive for gold’s safe haven perception.