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LAWRIE WILLIAMS: Gold clinging on to $1,800 – rises on Powell post FOMC statements

As this week’s FOMC meeting got under way the gold price continued to fluctuate marginally above and below the $1,800 level, failing to find any consistent directional movement.  Gold seems to be hugely fixated on U.S. inflation levels and whether the Fed will start to taper – probably by cutting back its bond purchases – sooner than its initial policy had suggested.  Whether it will also start to raise the Federal Funds rate from its current near zero levels, had seemed less likely given that a rise in interest rates might spook the equities markets, as that could be seen by the markets as a precursor of economic recession – something the Fed would probably not want to be associated with. 

In the event, as the FOMC meeting drew to a close. and initial reports of the deliberations among FOMC participants were rumoured, various interpretations on what was under discussion, and what would likely be Fed policy going forwards, and the timing thereof, did point the gold price in a specific direction – at least initially.  But such price movements do have a habit of changing as the various nuances of the post FOMC official Fed statements, and Fed chair Jay Powell’s comments thereon are digested and acted upon.

This time was no exception.  The initial reaction to what appeared initially to be a more hawkish outcome, driving the gold price a little lower, was reversed after Fed chair Powell’s subsequent reported statements. These appeared to rule out any change in the Fed’s likely timing on tapering or on interest rate advance.  Gold picked up, regaining the $1,800 level and ending the day a few dollars higher, while overnight in Asia and Europe, the price showed even more strength with the yellow metal exceeding $1,820 again at the time of writing.  The other precious metals were also marked up quite strongly, silver particularly so after a very weak few days, with the Gold:Silver ratio falling back to a little over 71 after a recent foray above 72.

What Powell reportedly said, which moved the markets away from the initial gold price fall, was as follows: "We see ourselves as having some ground to cover to get there.... We are not at substantial further progress. This meeting was the first deep dive on timing, pace, and composition but no decision was made,,, We are making progress. And we expect that if things go well … and when we reach our goal, then we'll taper at that point... Since the committee adopted its asset purchase guidance last December, we also reviewed some considerations around how our asset purchases might be adjusted, including their pace and composition once economic conditions warrant a change.  In the coming meetings, the committee will again assess the economy's progress toward our goals, and the timing of any change in the pace of our asset purchases will depend on the incoming data. As we've said, we will provide advanced notice before making any changes to our program."

So saying, Powell seemed to be ruling out any short-term changes to either the Fed’s tapering levels, or planned interest rate rise calendar, but promising to give plenty of advance warning if it is seriously contemplating so doing.

While Powell also acknowledged that current inflation levels were rather higher than anticipated, and would likely stay higher for longer, he still continued to believe the trend would be ‘transitory’ and eventually would start to fall back to near normality.  This suggested that the Fed would be prepared to live with higher inflation levels without making any short term change in current tapering, or interest rate, strategy.  This has to be positive for gold which tends to thrive on negative real interest rates which now look like being both with us for longer, and even trending higher.

Whether today’s gold price surge seen in Europe will survive the U.S. markets when they open later, remains to be seen, but the initial portents look good and we suspect a further degree of support for gold as we move into August.  But nothing in this market can be considered a certainty – it would only take some data seen by the markets as negative for gold to knock the metal back well below $1,800 again – or contrarily positive data to have it surging back towards $1,900.  We will just have to wait and see.

29 Jul 2021 | Categories: Gold, Silver, US, FOMC

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