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LAWRIE WILLIAMS: Gold nervous ahead of Powell's Jackson Hole statrement

We had thought that gold might move upwards from a $1,800 base this week, but so far the reverse has happened and prices have turned a few dollars weaker.  This is likely to remain the case until U.S. Fed chair, Jerome Powell,  makes his statement at the virtual Jackson Hole event later today, after which the yellow metal should find some kind of directional push.  Whether this is upwards or downwards somewhat depends on Powell’s comments on the timing of the likely bond purchasing program tapering and on whether there is any hint on the schedule for interest rate rises to mitigate inflation in the pipeline and how high these may be if and when they are implemented.  We suspect any real ‘normalisation’ of interest rates is so far into the future that we can discount the prospect for this for the time being.

We are happy to stick to our positive predictions on the gold price for the remainder of the year, but accept there may be some headwinds to be negotiated before any upwards tick takes place.  Gold seems to be out of investment favour at the moment given the continued advance of general equities and data releases, although these have shown signs of weakness yesterday, and Powell’s and other U.S. Fed statements will continue to provide short term direction to gold prices.

Current coronavirus infection data in the U.S. and elsewhere, may well impact the hoped-for economic recovery, although some governments seem to be keen to push ahead with supposed normalisation regardless.  Some do seem happier to encompass policies which may lead to increased mortality rates, but return everyday life to near normality, but the northern winter with its anticipated rising influenza infection rates, added to the prospect of increasing COVID cases, has to be worrying.  We suspect governments will increasingly put the burden of staying safe from infection on the general public itself.  Certainly we would anticipate the kind of precautionary measures we have all been taking will reduce the ‘flu impact this year too which is a welcome bonus.  But even so, the increasing burden of the more serious COVID pandemic on existing health systems could be particularly worrying.

Here in the UK we are already seeing supply shortages as a result of the pandemic, coupled with Brexit, and similar problems will be cropping up worldwide.  These kinds of difficulties are likely to be resolved over time, but how long this will take is rather less certain.  Undoubtedly they will lead to a slowing down in economic recovery around the globe, affecting some sectors more than others.

Compensatory price increases may well mean inflation pressures will be more severe than most official sources had predicted – and may go on for longer.  The negative real interest rates thus being experienced should keep gold investment positive as investors more and more understand the wealth preservation advantages of the yellow metal in such an inflationary environment.  This puts Central Banks – notably the U.S. Fed – in a difficult position.  Raising the Federal Funds rate significantly enough to have any controlling effect on what may become out-of-control inflation would likely precipitate a vicious economic downturn leading to recession or even depression.  If these steps are not taken, or delayed, as seems likely, real interest rates will become increasingly negative as inflation continues to rise – a hugely positive factor for the gold price, but probably not a situation most would wish to experience.

The additional fact that vaccine-induced immunity from COVID infection looks to drop off significantly after as little as 4-months is yet another negative factor for economic recovery.  Maybe the vaccines will continue to help protect us from severe COVID-induced illness, but this is as yet uncertain.  Booster shots are likely to be rolled out in a number of countries, but that will still leave much of the world, particularly in the poorer nations, without long term immunity, which means that things may not get back to any real degree of normality for the foreseeable future.

27 Aug 2021 | Categories: Gold, Dollar, US, FOMC, UK, Brexit

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