He did it again. It seems that Powell does not like gold. The price of the yellow metal declined more than 1 percent amid his testimony to the Congress, just as after February’s hearing. What did Powell say?
Gold Did Not Welcome Powell’s Remarks
Powell has testified to the Congress for the second time during his tenure. While Wall Street and the U.S. dollar pushed higher on Tuesday, gold didn’t like his remarks, as its price declined from $1,240 to almost $1,225, or more than 1 percent. So we had a replay of the action after his previous testimony to the Congress. Actually, after a short break on Wednesday, another wave of selling pressure hit the gold market on Thursday, as one can see in the chart below.
Chart 1: Gold prices from July 15 to July 17, 2018 (London P.M. Fix).
What did Powell say? Well, in his prepared introduction, he noticed that “the job market has continued to strengthen and inflation has moved up.” Regarding the labor market, he said that “the unemployment rate is low and expected to fall further,” while “wages are growing a little faster than they did a few years ago.” Powell was also optimistic about inflation. In particular, he noted that “the recent data are encouraging,” as the price index for personal consumption expenditures increased 2.3 percent over the 12 months ending in May, up from 1.5 percent a year ago.
Powell as the Real Hawk
You may think that Powell was upbeat about the economy. But you apparently have not seen the real hawkish statement of the Fed Chair:
Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years.
Oh, boy, over the next several years! It has been one of the strongest affirmations of the strength of the U.S. economy since the Great Recession. So it shouldn’t be surprising that, as Powell said:
With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate believes that.
It means two more interest rate hikes this year. And further increases next year. You have been warned.
Powell’s Q&A and Gold
Although Powell’s prepared remarks were really important, the real meat can always be found in the Q&A session. Indeed, the U.S. policymakers have grilled Powell a bit, asking several interesting questions ranging from financial regulations to wage growth and trade tariffs.
One of them concerned the narrowing of the yield curve. Powell said there is a lot of discussion of the curve among officials and that he looked at the yield curve “directly” as a gauge of what the “neutral” level of interest rates may be, whatever it meant. It’s a really fascinating issue and we will dig into this topic in the August edition of the Market Overview.
But the most important part of the Q&A sessions was the moment when Powell explained that the Fed believes that raising interest rates at a once-per-quarter pace is the best strategy “for now.” It means that the Fed under Powell will be much more hawkish than under Yellen. Brace yourselves!
Implications for Gold
Although Powell acknowledged some unknowns (when it comes to the trade disputes, or the impact of Trump’s fiscal policy), he was really optimistic about the economic outlook in front of the Congress. Indeed, the Fed chair’s semiannual congressional testimony on monetary policy rarely breaks new ground, but this time Powell provided an unprecedentedly hawkish stance on the U.S. economy. Given the safe-haven status of gold, it is bad news for the yellow metal.
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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.
Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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