Gold prices fell by about $25 after Federal Reserve Chairman Jerome Powell’s highly anticipated speech. According to analysts, the yellow metal is likely to risk falling to $1,600 unless buyers buy to the bottom.
Jerome Powell preferred a cautious hawk position
cryptocoin.com As you can follow, gold closed the week with a decrease of 1.14%. December Comex gold futures, on the other hand, were last down 1.22% at $1,749.8. At the Jackson Hole symposium, Fed Chairman Jerome Powell said there was no center coming from the Fed. He also noted that interest rates will remain high for longer than the markets expected. In a statement on Friday, Powell highlighted the following:
Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record warns strongly against premature easing of policy.
Powell also did not rule out the possibility of a 75 basis point increase at the next September meeting. In this regard, he reiterated that the decision will depend on the macro data released in the next three weeks. In this context, Powell made the following statement:
An unusually large raise may be more appropriate at our next meeting. Our decision at the September meeting will depend on the aggregate of incoming data and the evolving outlook.
Gold fell after Powell’s speech
The Fed chairman wants to avoid the mistakes of the 1970s, so he now plans to act aggressively. Jerome Powell explained this situation in his speech as follows:
The successful Volcker disinflation of the early 1980s followed numerous failed attempts to reduce inflation over the previous 15 years. It took a long period of very restrictive monetary policy to finally stop hyperinflation. Our aim is to prevent this outcome by acting decisively now.
Peter Mooses, senior market strategist at RJO Futures, said in a statement that there is weakness in the precious metals sector because of Powell’s words. “Gold fell after Powell said the Fed would continue to do its best,” Mooses said. It’s like they’re going to do whatever it takes to fight inflation,” he says.
“The expectation that the Fed will soften has disappeared”
Bart Melek, head of global commodities strategy at TD Securities, says Powell’s priorities are clear as he enters the September meeting. He notes that this is to move forward with aggressive actions to avoid the mistakes of the past. The strategist makes the following assessment:
The Fed looks at history and what happened in the 1970s and early 1980s. It’s like they want to be restrictive and keep interest rates higher for longer. They don’t want a situation where they let inflation settle. Many thought the Fed would soften as the economy slowed a bit. Now it appears that this will not happen.
“Traditionally this is pretty negative for gold”
According to Bart Melek, gold has responded to the promise of higher real interest rates, especially at the front end of the curve. The strategist notes that after Powell’s speech, 2-year Treasury bonds rose and inflationary expectations fell slightly.
When you combine higher nominal interest rates with lower inflation expectations, real rates are likely to move higher. Traditionally this has been pretty negative for gold. Because this causes prices to drop.
“In the longer term, I am still optimistic about gold”
However, Peter Mooses points out the repetition of Powell’s message. He says it’s possible that this could also help the gold. Mooses explains his views as follows:
I have concerns about US fourth quarter growth. He will tell you how the Fed will adapt. We see many of the same speech and patterns. It is possible for gold to recover in a day or two. However, if stocks strengthen, gold is likely to weaken. In the longer term, I’m still optimistic about gold.
Gold price levels to watch
According to Bart Melek, gold is very likely to drop below $1,700 next week. “There is no major upside price pivot for gold until the Fed is confident that it will reverse course. And that is unlikely until 2023,” he says. The analyst then points to the following levels:
There is strong support near $1,690-1,700. But if this is breached, a drop to $1,600 won’t come as a surprise.
Peter Mooses is watching the $1,690 level for the yellow metal. The analyst expects buyers to come around this level. From this point of view, he draws attention to the following level:
The $1,880 level is a realistic price to return for gold in the next few weeks.
Next week’s data
Bart Melek adds that with the Fed’s focus on macro data, August inflation and employment reports will be the key market drivers to watch before the September meeting. Melek makes the following comment on the subject:
Currently, market forecasts for payrolls are for the unemployment rate to remain at 3.5% and the economy to add about 300,000 payrolls. That’s still pretty good for August, too.
- Tuesday:US Federal Reserve consumer confidence
- Wednesday:US ADP non-farm employment change
- Thursday:US jobless claims, ISM manufacturing PMI
- Friday:US non-farm payrolls
