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LAWRIE WILLIAMS: Gold ends the week above $1,290 after Yellen and Draghi statements

Well gold wasn’t ‘Jackson holed’, at least not in dollar terms,  at the annual central bankers’ and economists’ shindig in Wyoming on Thursday and Friday and ended the week marginally above $1,290 causing many analysts to see $1,300 and higher in their sights yet again. Indeed the biggest casualty of the event appears to have been the U.S. dollar, with the dollar index ending the week at around 92.5 – its lowest weekly closing level since January 2015.  By contrast when President Trump was inaugurated on January 20th the dollar index was at around 102 – and had reached 103 just ahead of the Christmas 2016 holiday after the U.S. Presidential election result was declared.

By contrast, with neither Janet Yellen, nor Mario Draghi prepared to rock the boat with somewhat anodyne addresses to the meeting, it was the Euro which gained most against the dollar getting close to 1.19.  This perhaps will not have been received too happily in Europe where manufacturers say they are being adversely impacted by the strength of the currency.

In this context gold’s performance may be seen as a little disappointing in dollar terms, and even more so in stronger currencies.  Since the beginning of the year the dollar has fallen by around 10%, while gold has risen vis-à-vis the dollar by 12% - which seems about right – but in the Euro gold has actually fallen by 2.5%!  Even in a currently weak currency like the UK pound sterling, gold is only up 6% year to date, but the strength of the Euro, which is very much shown by its performance in gold terms, has to be worrying for Draghi and the ECB and does suggest that the ECB is unlikely to tighten monetary policy in the near future.

But should we be looking at the Euro gold price or the dollar one to try and second guess gold’s likely path?  This coming week will be interesting and we suspect the price may remain range-bound in the $1,290s ahead of the U.S. Labor Day holiday on September 4th.  As we have pointed out before, Labor Day can mark an inflection point in various economic parameters, including the gold price.  There are also U.S. Fed and ECB policy meetings due in the second half of September and the U.S. FOMC one in particular will be viewed with particular interest vis-à-vis gold given observers will be looking for hints on the likely date for the next interest rate rise decision and/or Fed balance sheet reductions.  The U.S. economy is not performing as well as forecast by the Fed (it seldom seems to!) so there are some who believe any rate increase will now likely be put off until next year, although the odds still are on a December rate rise decision.

Market reaction after Labor Day, and before the FOMC meeting will probably see gold react positively or negatively to economic data (fact or supposition)  coming out in the interim, which may hold gold back from bursting through $1,300, which it would likely do if the FOMC looks like delaying any interest rate rise decision beyond the calendar year end.  An indication that the Fed will indeed continue its tightening programme in December may knock the gold price back temporarily, but probably not affect its ongoing progress in the medium term.

Similarly the ECB policy meeting in Frankfurt, which comes just after the FOMC meeting, will also be followed with strong interest, but we doubt that will see any further tightening while the Euro remains at current levels against the dollar.

We still see gold rising through $1,300 and perhaps hitting $1,350 by the year-end, but sometimes Q4 can prove to be a weak period for precious metals, so we are not wholly confident on this prediction.  Watch purchases into, or liquidations out of, the SPDR Gold Shares ETF (GLD) to get an indication of which way the tide is flowing.

26 Aug 2017 | Categories: Gold, Dollar

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