(Kitco News) After a poor start to the week, the precious metals sector is seeing a turnaround as markets continue to calibrate for Federal Reserve Chairman Jerome Powell’s keynote address at the Jackson Hole symposium.
Gold and silver staged an impressive rally on Tuesday as the US dollar index retreated from 20-year highs and bargain hunters entered after last week’s sell-off.
The big catalyst for precious metals and markets this week is Powell’s speech at the Jackson Hole meeting on Friday, which for now only has a placeholder title: “Economic Outlook.” But the general theme of the symposium will be ‘Reassessing the limitations of economics and politics’.
“[The theme] suggests a focus on the supply side of the economy…As pressure on global supply chains eases, that implies a reduction in inflation could now be achieved with a relatively modest easing of demand. It is a key basis for our view that a recession can still be avoided in the coming quarters. The Fed clearly expects a similar outcome, and officials may try to bolster that case next week,” said Andrew Hunter, senior US economist at Capital Economics.
US dollar and US Treasury yields continue to be the main drivers for gold. Every time they go up, gold pulls back, while any decline triggers a rally in the precious metal.
“The dollar continues to draw a lot of strength from risk aversion and fears that the Fed will reaffirm its aggressive message this week,” said Lukman Otunuga, senior research analyst at FXTM. “If Powell strengthens expectations that the Fed will move forward with another huge rate hike in September and more tightening ahead, this could boost the dollar. Alternatively, a Powell sounding cautious and expressing concern about the economic outlook for US moves, weakening the dollar.”
Markets remain divided on whether the Fed will raise rates by 50 basis points or 75 basis points at its September meeting. CME’s FedWatch tool shows a 51.5% chance of a 50bp rise and a 48.5% chance of a 75bp rise.
What will Powell say?
The Fed is known for using the Jackson Hole symposium to signal significant changes in monetary policy. However, this time around, analysts are not expecting substantial changes as Powell will want to give the Fed maximum flexibility before the September meeting while they wait for another set of employment and inflation figures.
“We don’t think the Fed will corner itself ahead of the September 20-21 FOMC meeting. Rather, we expect the Fed to try and manage market expectations in Jackson Hole,” said Win Thin, chief strategy officer at BBH global currencies.
So far, the Fed has been fairly consistent in staying hawkish despite some mixed signals from the latest Fed meeting minutes released last week. Minutes from the July FOMC meeting showed that Fed officials agreed on the need to slow the tightening cycle eventually, but believed the Fed first needs to see how rate hikes are affecting inflation.
Concerns about another Fed hike amid growing recession fears are eroding risk sentiment in the market, which should benefit gold.
“There is a strong sense of uneasiness in financial markets as investors grapple with concerns about inflation, nervousness over tightening US monetary policy, and heavyweights congregate to discuss major economic issues” Otunuga pointed out.
The big takeaway everyone is looking for is additional insight into the Fed’s thinking on inflation, the economy, and the future of monetary policy. “What Powell reveals during the speech or chooses to hide could set the tone for global markets in the coming weeks,” Otunuga said.
Powell is likely to strengthen his hawkish stance on Friday and back off some of the markets’ new ideas about a possible Fed pivot, according to analysts.
“[The Fed chair] is expected to reiterate a determination to keep going higher to control prices, where it can send a clear message that even if they have a slower pace of rate increases, they may not be quick to pivot and cut rates,” said the MKS PAMP director of metals strategy Nicky Shiels: “If very few in the US government actually believe we are in a recession (with the changed definitions), then how can the pause in gains be justified?” of rates if there is simply no recession?”
It is also widely anticipated that the Fed chairman will try to be as direct as possible when pushing against the Fed pivot idea.
“He may try to send a clear message that even if they have a slower pace of rate increases, that will not indicate a lower top rate or that they will cut rates quickly,” said Edward Moya, senior market analyst at OANDA. “After this week, Wall Street shouldn’t be surprised if Fed Funds futures start trading in rate hikes for next year. This could be the week that many return from vacation and double down on their recovery calls for the bear market”.
Expect more volatility in the price of gold
Analysts are divided on where gold is headed but are confident the precious metal will be very volatile this week.
“The potential for volatility in the precious metal is high this week, thanks to comments from Jackson Hole and Powell that could act as a new fundamental spark for gold. If prices can break above $1,724, a sell-off towards $1,700 is in play. Alternatively, a move back above $1,752 can open a path back to $1,770 and $1,800, respectively,” added Otunuga.
Any moderate surprise could spark a rally in gold, Shiels added, citing favorable tactical positioning.
“Structurally, the precious market remains flat or short precious, while tactically, asymmetric risks are clearly building in September, ie: short + seasonal upside + low prices + dovish Powell (vs. market expectations) could be a bullish setup/reversal later this week or next week after Jackson Hole,” he said.
On the other hand, an aggressive Fed would mean a lower price floor for gold in the fall, Moya noted. “Gold will eventually settle into a trading range but it looks like the floor could be a bit lower as energy and food inflation risks could keep the Fed aggressive with rate hikes in the new year,” he said. “It looks like gold is about to stabilize above the $1,750 level before we hear from Fed Chairman Powell on Friday.”
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