By Barani Krishnan
Investing.com – For those who know Jerome Powell well, his removal of the stimulus this week should come as no surprise.
Anyone who guesses otherwise and thinks the Federal Reserve chairman will be more concerned about inflation may have paid dearly on Friday as dollar and treasury yields fell and gold rose.
The most anticipated Fed event of the year — and arguably the US economic calendar — ended on a whim, as Powell proved in his speech to the Jackson Hole Symposium that for the central bank it is job creation, not price pressure.
Without ambiguity as to which of its two mandates the Fed prioritized, attention – at least for the readers of this column – is returning to what this means for commodities, particularly the gold price.
Well, gold was firmly above the $1800 level for the first time in three weeks – I say “solid” because the yellow metal has been in the periphery of $1800 since Monday when it’s not there at the same time – but that’s only part of the story.
To really determine where gold is headed in the near term, we’ll have to wait for the US in August job report due this Friday or September 3.
Why? Because that’s exactly what the Fed will be watching if it ever announces a rundown of the $120 billion in combined government bond and mortgage-backed securities it’s bought over the past 18 months to insulate the economy from the effects. from Covid.
To be sure, Powell focused precisely on employment in his Jackson Hole speech.
More than a year after the COVID-19 crisis, restoring job growth remains one of the biggest challenges for Fed policymakers. More than 21 million U.S. jobs were lost between March and April 2020, at the height of corporate lockdowns imposed by the coronavirus, and about 7 million have yet to be topped up, officials say.
“Today, with significant slack in the job market and the pandemic continuing, such a mistake could be particularly damaging,” Powell said.
“The timing and pace of the upcoming cut in asset purchases will not be intended to send a direct signal about the timing of the rate hike, for which we have formulated a different and significantly tougher test,” the Fed added. chairman. He also stressed the need to avoid an “ill-timed policy measure” amid lingering new uncertainties of the Delta variant.
Decoded, that means the Fed would keep a razor-like focus on the labor market for taper cues.
More importantly, “weekly and monthly jobs data will dictate the timing of a rate hike,” said Phillip Streible, precious metals strategist at Blueline Futures in Chicago.
As mentioned earlier, those who have correctly bet on Powell in recent months will know that the greater the improvement in jobs in the US, the greater and faster the likelihood of a winding down. Accordingly, the outlook for stock and gold prices will be worse. This is one of the ironies of the modern US economy, where investing on Wall Street is sometimes nothing more than a game of dart-throwing chimpanzees running on stimulant steroids.
Streible also agrees, saying, “As a gold and silver investor, you want to see a sustained recovery in the labor market, leading to a longer trajectory of the recent price recovery.”
The July jobs report was the best in a year, with 943,000 jobs after the 1.76 million in July 2020. More importantly, it brought the monthly unemployment rate – the holy grail for a downsizing – from 5.9% in June to 5.9% in June. 4%. The Fed’s definition of “full employment” is a 4% unemployment rate. No one believes we will get it, 4.9%-4.5% is as good as it gets for many.
For now, job growth for August is conservatively estimated at 728,000. If, for whatever reason, the number turns out to be as good as July’s, that could narrow the unemployment gap by another half a percent, bringing us to 4.9%. That could start the Fed’s countdown to a winding down, with September-October likely marking the first announcement before what could be followed by a $10 billion monthly cut that would reduce the stimulus to zero within a year, if all goes well. goes. And rarely, in our world, does something go so well.
“Had you not had a chance to expand your current position or feel underweight in gold, you would need the number of jobs to meet expectations,” Streible wrote in an outlook published Friday. “That will cause a small sell-off in gold as it trades within the likely range of $1819.80 to $1,779.80.”
Conversely, a disappointing runway number extends gold’s rally further “to our next big three-star pocket resistance of 1835-1840/oz,” Streible wrote.
The last time gold traded north of $1,830 was in mid-July. If it hits $1,850, it could easily scale $1,900, allowing for a potential return to the $2,000 record highs of a year ago — if all goes well, which, again, is rare in our world.
Gold Market & Price Roundup
Gold hit its three-week high Friday, posting its best weekly gain since May, after Powell failed to provide a clear timetable for phasing out US stimulus spending at the much-anticipated Jackson Hole symposium on central monetary policy. Bank.
Dollar and Treasury yields plummeted as risky assets from stocks to commodities, including oil, rocketed. Gold, which has been labeled a safe haven, has also seen gains given its sensitivity to inflation, which typically drives prices of the yellow metal.
First month gold on Comex in New York closed $24.30, or 1.4%, at $1,819.50 an ounce, after a three-week high of $1,821.55. For the week, it rose about 2%, the most since the week to mid-May.
The Fed has purchased at least $80 billion in Treasury bills and $40 billion in mortgage-backed securities from government agencies every month since March 2020 to protect the U.S. economy from the effects of the coronavirus pandemic. The central bank has also kept US interest rates at record lows of zero to 0.25 percent.
The question of when the Fed should wind down its stimulus measures and raise interest rates has been hotly debated in recent months, as economic recovery has clashed with a resurgence of the Delta strain of the coronavirus.
The Fed’s stimulus program is blamed for mounting price pressures in the United States, where economic growth for the second quarter of 2021 was estimated on Thursday at 6.6 percent — above the 3.5% decline noted for the whole of 2020 . economic growth of 6.5% for the whole of 2021.
The Fed’s Preferred Meter for Inflation – the core personal consumption expenditure (PCE) Index, which excludes volatile food and energy prices, rose 3.6% over the year through July, the highest level since 1991. The PCE index, which includes energy and food, rose by 4. 2% on an annual basis.
The Fed’s own inflation target is 2% per year.
Excluding the Fed’s asset purchases, the Biden administration has exceeded $1.2 trillion in COVID-19-related spending since the president took office in January. Democratic lawmakers who joined Biden this week have submitted a further spending plan this week for $3.5 trillion to advance his economic agenda.
Oil Price Market & Price Roundup
Crude oil prices closed the penultimate week of August with double-digit gains that outweighed a week ago’s crash, aided by a hurricane watch and the latest comments from Fed Chair Jerome Powell about when to cut central bank stimulus spending. discontinued.
New York-traded West Texas Intermediate crude, the benchmark for US oil, came in at $68.74 a barrel on the day, up $1.32 or 2%. For the week, WTI rose 10.3%, overshadowing last week’s 8.9% decline by concerns about a Covid revival of the Delta variant.
London-traded Brent, the global benchmark for oil, settled at $72.70, up $1.63 or 2.3%. For the week, Brent gained 11.5%, after dropping 7.7% last week.
For WTI, it was the strongest weekly gain since September 2020, while for Brent it was the biggest weekly gain since May 2020.
Crude oil prices rose as US oil and gas companies rushed to complete evacuations from offshore platforms in the Gulf of Mexico as Tropical Storm Ida swept into the region before making landfall as a Category 3 hurricane. The gulf is home to oil fields that supply about 17% of U.S. oil production. More than 45% of the total US refining capacity is also located there.
“The risk of intensity increasing before landing could support prices through the end of the week,” said Craig Erlam, an analyst for OANDA in New York. “Several companies have removed workers from offshore facilities in anticipation of the storm.”
Oil also recovered as Fed Chairman Powell said the US economy was on good terms but still vulnerable to the risks of the coronavirus pandemic.
Calendar for energy markets ahead
Monday Aug 30
Cushing inventory data from surveyor Genscape
tuesday 31 aug
American Petroleum Institute weekly reporting on oil stocks.
wednesday september 1
EIA weekly report on raw stocks
EIA weekly report on gasoline stocks
EIA weekly report on distillates stocks
thursday 2 sept
EIA weekly report on natural gas storage
friday 3 sept
Baker Hughes weekly survey on US oil rigs
Disclaimer: Barani Krishnan has no position in the goods and securities he writes about.