LAWRIE WILLIAMS: Gold dives again on dollar strength and fears of Fed aggression
One step forward, two steps back – that seems to have been the story for the gold price in recent weeks. A week ago we were commenting on gold breaking up through the $1,800 barrier and ending the week at that exalted level by recent standards. We were contemplating whether this represented a true breakthrough that would hold up, but any thoughts that it might do so were swiftly dashed. U.S. trade and a surging dollar swiftly put an end to that scenario as speculation that the Fed might be becoming more accommodative in its approach to inflation control began to fade away.
True the Chicago Mercantile Exchange’s Fedwatch Tool moved marginally in favour of that august body only imposing a 50 basis point (1/2%) increase in the Federal Funds Rate at September’s FOMC meeting rather than a repeat of July’s 75 basis point rise (current odds are 59:41 in favour of the 50 basis point boost). But even a 50 basis point rate increase would have been considered alarming only a few months ago when perhaps what would now be considered a minimal 25 basis point increase would have been seen as a hawkish move!
Higher interest rates almost automatically lead to a stronger dollar, particularly as other nations - many, if not most of which, are suffering from similar inflationary problems to the U.S.- but are perhaps being slower, or less aggressive, in their reactions. As interest rates rise, so do Treasury yields and to an extent gold competes against these. Hence pressure on the gold price ensues. As yields stabilise then pressure on the gold price may fall away, particularly if inflation continues to exceed real interest rates.
This week there are a few things to watch out for which could make for some big changes in sentiment, although the most significant of these occur towards the week’s end. On Thursday we should see the release of revised Q2 GDP statistical data which will either confirm or reverse the preliminary findings suggesting a negative reading for the quarter following the Q1 decline. There will also be an announcement that day on jobless claims which could influence the Fed’s position on its approach to interest rate policy and as to whether the U.S. is slipping into recession or not.
Thursday and Friday sees the Kansas City Fed’s annual Jackson Hole Economic Symposium, which brings together global economists, financial market participants, academics, U.S. government representatives and news media to discuss the latest developments in the economy. While all, or any of the presentations at this prestigious event may have specific relevance to the markets, Fed chair Jerome Powell’s keynote presentation on the Friday will be listened to with particular interest for any hints on which way the Fed will move at the September FOMC meeting. Powell though plays his cards close to his chest so whatever he may say may need deep interpretation.
One other point which is worth mentioning here, is that equities and cryptocurrencies had seen their prices advance on the perception that the Fed might well be becoming less aggressive ahead. But this week sentiment appears to have changed somewhat and markets in both appear to have weakened – not before time we feel. If the U.S. is already in, or even headed for, recession, recent market strength looks to be anomalous and in our opinion equities and cryptocurrency prices are not sustainable at current levels. Gold, on the other hand, should be in a stronger position than it is now. As time progresses we are beginning to doubt some of our own positive forecasts for the yellow metal for the current year, but mostly perhaps in timing, rather than in general direction of travel. The dollar is probably stronger than it should be in terms of purchasing power and if, and when, it begins to fall back, gold should advance accordingly.
So where do we see the U.S. Fed going from here in terms of interest rate policy. While much may depend on the next U.S. CPI data release on September 13th , assuming this doesn’t show a return to an excessive level we would align ourselves with the majority and predict a 50 basis point increase at the September meeting. All things progressing as we think they will we could well see another 50 basis point increase in November and perhaps 25 basis points in December bringing the year-end Federal Funds rate to 3.5-3.75%.