LAWRIE WILLIAMS: FOMC outcome boosts gold price - reflections
We probably should say ‘I told you so’ as Tuesday’s and Wednesday’s Federal Open Market Committee (FOMC) deliberations, and the subsequent gold price movement, were pretty much as we had predicted. Confirmation that the proposed tapering of bond purchases would start to be wound down this month, admittedly aided by some positive PMI data, caused the gold price to lose ground pretty sharply. And then Fed chair Jerome Powell’s statement indicating that interest rate rises would likely be further away timewise than most of the market – but not us – had been anticipating had the opposite effect on gold and we saw a subsequent price recovery
Although this price pick-up was somewhat limited in late trading on Wednesday, and the gold price still ended the day rather lower than it had started it, perhaps one should have taken note that the gold equities almost all rose despite the lower gold price. Equities often lead!
Given time to assess and interpret Powell’s statement, precious metals all moved sharply higher in Thursday’s trade and remained in the $1,790s on Friday in European trade – and even touched $1,800 spot at one brief time. We had intimated that this would be the likely scenario and had even contemplated that gold might again test the $1,800 level as it did, but was again found lacking. As I write it’s in the $1,790s so it may even test the $1,800 psychological barrier again today, although it seems to be experiencing strong resistance the nearer it gets to that mark.
What Powell said is that inflation looks like being more persistent than initially acknowledged, but still that it is still only temporary and will revert back to around the 2% level where it had been hovering over the past few years. Even so he is reluctant to raise interest rates for fear of interrupting the recovery in employment levels seen of late, although he yet again intimated that unemployment is not yet coming down as fast as he would like.
There is speculation at present in the U.S. that Powell, a Republican, may not be reconfirmed in his position as Fed chair when his term ends in February. Lael Brainard, a Democrat, seems to be the media’s favourite to replace him. But it should probably be recognised that Powell has followed a pretty non-partisan approach in his time as Fed chair to date, and his replacement certainly is not a foregone conclusion despite his assumed political allegiances.
Brainard is considered to be more in the ‘dovish’ camp and if she takes over she is likely to lead the Fed in this direction. There is little doubt that her political leanings are perhaps more attuned to those of U.S. President Joe Biden and she does have a strong following regardless among Republicans as well as Democrats, so could be a popular choice to lead the Fed if Powell’s position is not reconfirmed.
Powell is still the bookmaker’s favourite for reconfirmation, but if Brainard takes over she would be expected to lead in extending the Fed’s stated timeline for the central bank to start raising interest rates out until late 2022, or even beyond. But then that seems to be little different from Powell’s latest conclusions. In other words a Brainard-led Fed would probably be unlikely to follow a different path than that set out already by Powell, given the latter seems to be becoming more ‘dovish’ in his outlook over successive FOMC meetings.
What does all this mean for gold? We see the extension of the ultra-low interest rate policy in the face of worryingly persistent inflation rises, whoever leads the Fed, as positive for the yellow metal going forwards. It should lead to a weaker dollar, but with other central banks following the Fed’s lead on interest rates, any falls in the greenback’s comparative valuations would probably be muted. That would likely mean that although the overall trend may be positive for gold it is unlikely to be strongly so, meaning that any gold price rises are likely to be slow and steady rather than spectacular.
05 Nov 2021 | Categories: Gold, Dollar, US, FOMC