On Friday and Monday, the intra-day price movement of gold was driven to a large extent by the Fed officials’ comments. What does it imply for the gold market?
The last few days were very interesting. First, on Friday, the Boston Fed President Eric Rosengren, a voting member of the Federal Open Markets Committee, surprised the markets with his hawkish comments. In a speech in Quincy, Mass., he said that “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy”, since “a failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery”. Markets just freaked out after these words, perhaps because Rosengren had been considered a dove. Investors could also be in a bad mood after the ECB’s failure to please them. Anyway, every asset class (naturally, except for the USD) was down. The S&P 500 index plunged about 2.5 percent, marking the worst day since the sell-off after the Brexit vote. The technical indications had been pointing to lower prices in stocks for weeks, though (and the same was the case with metals). Bonds and gold got hit too, as the sell-off was driven by fears over a quicker pace of monetary tightening. Indeed, the market odds of a rate hike in September rose to 30 percent from 24 percent before Rosengren’s comments.
However, the panic did not last long, as the Fed Governor Lael Brainard sent a dovish message and calmed the markets. On Monday, in a speech in Chicago, she urged “prudence in the removal of policy accommodation”, since – given the likely moderate and gradual effect on inflation of further gradual tightening in labor market conditions – “the case to tighten policy preemptively is less compelling”. After Brainard’s remarks, the market odds of a September rate hike decreased to 15 percent from 24 percent. Consequently, the price of gold rebounded yesterday on an intra-day basis, closing without a bigger change for the day (please note that within a downtrend, the market focuses on bearish news, while bullish news can be mostly ignored).
The take-home message is that – as far as the intra-day price moves are concerned - the asset markets, including the precious metals market, remain under significant influence of the Fed and other major central banks (however, other fundamental and technical factors also count). Friday’s sell-off was most likely about the hint that the U.S. central bank may actually hike this month. It shows that investors should not neglect the possibility of a Fed hike in the near future. However, the markets have calmed and reduced the likelihood of a September interest rate rise, so the price of gold should stabilize within the current trend, at least until the next surprising comments from the Fed officials.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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