LAWRIE WILLIAMS: Gold can’t hold $1,800 level – yet
Tuesday saw gold back above $1,800 but not sufficiently strongly to be able to retain this level and was again sold back below this key figure on Wednesday and Thursday morning. At the time of writing (11.00 am on Thursday morning in the UK) it was back in the high $1,770s and perhaps poised to fall further. Gold lacks momentum at the moment with equities and bitcoin seemingly attracting the positive attention and the U.S. dollar strengthening again.
We still think that the sub-$1,800 level for the gold price remains temporary, but it is certainly finding this mark tough to break back up through, and probably will continue to do so until next week’s FOMC meeting when the latest Fed guidance on ‘tapering’ of its bond purchasing programme is anticipated. If, as many expect, Fed chair Jerome Powell will confirm that tapering moves will be implemented before the year end, this will be seen as confirming the Fed’s view that the U.S. is indeed in pandemic recovery mode, although new infection incidence remains high, and perhaps even more disturbingly mortality rates seem to be increasing. Yesterday’s figures show over 150,000 new infections were recorded in the U.S. and even more disturbingly over 2,000 COVID-related deaths – the highest daily figure for 6 months.
Views on whether the Fed will start its tapering programme before the end of the current calendar year are somewhat mixed. The consensus opinion is that at least a degree of tapering – perhaps a reduction but not necessarily a cessation – will be put in place sooner rather than later. There are also views that a degree of tapering will remain for the foreseeable future. We are of the opinion that politically the Fed will start to taper this year, but not completely, so we have a foot in both camps here. While some data suggests that the U.S. economy is indeed recovering, albeit slowly, other data is not quite so supportive of this view.
U.S. inflation as being experienced by the general public – particularly in energy and food prices – is running far higher than the core levels the Fed seems to rely on for its decisions, and this is a pattern being seen in many other advanced nations too. It certainly looks as though general inflation levels are higher, and likely to be longer-lived, than Powell and the Fed are prepared to contemplate. So saying, though, there is the possibility that at least some of the FOMC meeting participants may take this real inflation situation on board, which could lead to some mitigation in the level and speed of any tapering that may be under consideration.
Perhaps key to the direction of the gold price going forwards is the likely timetable from the Fed of possible interest rate rises. These would impact the dollar, equities and precious metals with any planned increase, however small, probably driving the former marginally stronger and the others perhaps weakening, but probably only temporarily. However we would anticipate any post-FOMC meeting statement being vague on possible timing enabling the Fed to keep its options open.
So we do not see any immediate change in pattern for precious metals prices moving forwards. We would expect the $1,800 level to be breached on the upside within the next month, but it will probably need a push up through $1,830 or higher before such a move can be considered permanent in any shape or form and even then may be vulnerable to the occasional sell-off.
