(Kitco News) After a rough start to the week, the precious metals sector is seeing a turnaround as markets continue to calibrate for Federal Reserve Chairman Jerome Powell’s address at the Jackson Hole Symposium .
Gold and silver saw an impressive rally on Tuesday as the U.S. dollar index retreated from 20-year highs and bargain hunters moved in after last week’s sell-off.
At the time of writing, December Comex gold futures were trading at $1,764, up 0.90% on the day. And September silver futures were at $19.10, up 0.94% on the day.
The big catalyst for precious metals and markets this week is Powell’s speech at the Jackson Hole meeting on Friday, which has just one placeholder title: “Economic Outlook.” But the general theme of the symposium will be “Reassessing Constraints on Economics and Politics.”
“[The theme] suggests a focus on the supply side of the economy… As pressure on global supply chains eases, this implies that a reduction in inflation could now be achieved with a relatively modest moderation of the 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 look to bolster that case next week,” said Capital Economics U.S. economist Andrew Hunter.
The US dollar and US Treasury yields remain the dominant drivers of gold. Every time they rise, gold retreats, while any decline triggers a rally in the precious metal.
“The dollar continues to gain strength from risk aversion and fears that the Fed will reassert its hawkish message this week,” said FXTM senior research analyst Lukman Otunuga. “If Powell bolsters expectations that the Fed moves ahead with another jumbo rate hike in September and further tightening later, that could boost the dollar. Alternatively, a cautious Powell expressing concern about the U.S. economic outlook may reduce the odds of “a high rate. moves, weakening the dollar.”
Markets remain divided on whether the Fed will raise rates by 50 or 75 basis points at its September meeting. The CME’s FedWatch tool shows a 51.5% chance of a 50bp hike and a 48.5% chance of a 75bp hike.
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 don’t expect any substantial changes as Powell will want to give the Fed maximum flexibility ahead of the September meeting as they wait for another set of employment and inflation data.
“We don’t think the Fed is backing itself into a corner ahead of the September 20-21 FOMC meeting. Rather, we expect the Fed to try to manage market expectations in Jackson Hole,” said Win Thin, head of the BBH’s global currency strategy.
So far, the Fed has been fairly consistent in staying on the dovish side despite some mixed signals from the latest Fed meeting minutes released last week. Minutes from the July FOMC meeting showed Fed officials agreed on the need to slow the tightening cycle, but believed the Fed first needs to see how rate hikes are affecting inflation.
Concerns about another outsized Fed hike amid growing recession fears are eroding risk-on sentiment in the market, which should benefit gold.
“There is a strong sense of unease in financial markets as investors grapple with concerns about inflation, jitters about tightening U.S. monetary policy and recession fears. This will be a big week for markets thanks to the annual Jackson Hole Economic Symposium where central bankers and finance heavyweights gather to discuss major economic issues,” Otunuga noted.
The big thing 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 hold back could set the tone for global markets in the coming weeks,” Otunuga noted.
According to analysts, Powell will likely strengthen his hawkish stance on Friday and push back on some of the markets’ new thinking around a potential Fed pivot.
“[The Fed chair] is expected to reiterate the decision to keep hiking to control prices, where it can send a clear message that while they have a slower rate of rate hikes, they may not be quick to turn around and cut rates MKS PAMP’s head of metals strategy Nicky Shiels said: “If very few in the US government really believe we are in a recession (with the definitions being altered), then how can you justify the pause in rate hikes if there is no recession?”
It is also widely expected that the Fed chair will try to be as straightforward as possible when opposing the idea of a Fed pivot.
“It can try to send a clear message that even if they have a slower pace of rate hikes, that’s not going to indicate a lower top rate or that they’re going to come down quickly,” explained OANDA senior market analyst Edward Moya . “After this week, Wall Street shouldn’t be surprised if Fed funds futures start pricing in rate hikes for next year. This could be the week many return from vacation and fold their calls in the bear market.”
Expect more volatility in the price of gold
Analysts are divided on where gold is headed, but they are confident the precious metal will be very volatile this week.
“Volatility potential for the precious metal is high this week, thanks to observations from Jackson Hole and Powell that may act as a new fundamental spark for gold. If prices manage to break above $1,724, a sell-off is expected to $1,700. Alternatively, a pullback above $1,752 may open a path towards $1,770 and $1,800 respectively,” Otunuga added.
Any modest surprise could trigger a rally in gold, Shiels added, citing favorable tactical positioning.
“Structurally, the pricey market remains flat or short, while tactically, asymmetric risks are clearly piling up in September, ie: short positioning + seasonal advantage + low prices + favorable Powell (compared to market expectations ) could be a bullish setup/reversion later this week or next after Jackson Hole,” he said.
On the other hand, an aggressive Fed would mean a gold price floor 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. “Gold looks poised to stabilize above the $1,750 level before we hear from Fed Chair Powell on Friday.”
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