LAWRIE WILLIAMS: Jackson Hole take-away. Gold takes off again.
We seem to be running to catch up. First we were somewhat ahead of the gun in assuming that gold might well break back through the $1,800 level again last week and initially it certainly looked as though we were mistaken in our predictions. The likelihood of this gold price level being achieved as the week progressed looked ever less in prospect. But then along came Fed Chair Jerome Powell’s Jackson Hole statement and gold did at last meet our forecasts, albeit it was only very late in the week that it came about, with Powell’s ‘dovish’ presentation giving a strong price boost to the whole precious metals complex.
In retrospect nothing Powell said was in any way unpredictable. Although there had been some slightly encouraging U.S. economic and jobs data, it was also apparent, if one was following the figures, that U.S. coronavirus pandemic growth statistics could well derail the pace of any economic recovery. Indeed with recorded daily new infections approaching the 2,000 level, and seemingly rising – something that had not been seen since the wave peaks back in January - and mortalities exceeding 1,000 a day, a new era of pandemic-related economic impact was definitely beginning to rear its head. To take any premature decisions on bond purchasing tapering, or interest rate rises would thus, as Powell said, be ill-timed.
In the event it still looks as though a tapering decision may be taken by the Fed late this year, but Powell wouldn’t be drawn on timing. He commented as follows: “We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance.” While Powell did comment that he felt that the Fed’s inflation target has been met, he continues to counsel patience so there doesn’t seem to be any likelihood that tapering will be introduced earlier than previously anticipated. While if the growth in pandemic infections starts to adversely affect the current good economic growth being seen. Then the initiation of any tapering programme may even be delayed.
Likewise, on potential interest rate rises to combat rising inflationary trends, Powell noted that “We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment.” He went on to intimate that this condition had not been met as yet which suggests any interest rate raising move might not be for some considerable time. As we’ve said before, the Fed is particularly nervous about rate rises because of a possible setback to economic growth as a result. The last time it initiated a rate rise. The economy and the equity market turned down and the policy was quickly reversed.
All in all Powell’s statement was seen as particularly cautious – perhaps excessively so, which was fodder for the bullish element amongst gold investors. Add to this the fact that no quick interest rate rise being in prospect, coupled with the highest inflation level in over 30 years as measured by the Fed’s preferred PCE index, means real interest rates will remain negative – seen as a strongly positive indicator for the gold price.
The dollar index also fell back following Powell’s statement, which will have contributed to the gold price rise in U.S. dollars. The Afghanistan withdrawal debacle will also be adding to global geopolitical uncertainty – another gold positive factor. Once all this is taken into consideration, the prospect for further gold price rises ahead looks strong. However data releases next week could put a dent in gold’s prospects if they support the likelihood of U.S. economic growth advancing and thus Fed tapering beginning sooner than expected. Conversely it could support them if the reverse is true.