Federal Reserve Chair Jerome Powell has opened the door to rate cuts next month, but that position could become complicated if inflation pressures continue to rise.
Although gold prices remain well supported, analysts note that any complication in Federal Reserve monetary policy could limit the precious metal’s upside potential. Gold is ending the week in the middle of its near-term broader range; spot gold ended Friday at $3,371.23 an ounce, up 1% from last week.
Most of gold’s gains came Friday, after Powell’s much-anticipated speech at the Federal Reserve’s annual central bank symposium. Powell highlighted the growing economic risks of rising inflation and slowing activity but noted that there is still room to cut interest rates.
“…With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he said.
Economists note that Powell’s comments clearly support easing in September, but that doesn’t mean the central bank will be prepared to cut rates aggressively through year-end, despite market expectations. According to the CME FedWatch Tool, markets are pricing in the potential for two more rate cuts before the end of the year.
“Despite the dual risks to their mandate – potentially higher inflation and higher unemployment – Powell indicated that it was time to focus more on employment than inflation. He was clear that one rate cut didn’t mean the Fed would follow that by a string of additional rate cuts on a pre-set course, but he did acknowledge that the current level of interest rates is a little too high,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
Jeffrey Roach, Chief Economist for LPL Financial, said he is not convinced the Federal Reserve will be able to ease rates beyond September.
“The hint of upcoming rate cuts will tamp down yields and bolster markets in the near term. But looking out on the horizon, structural shifts in the economy have created uncertainty about the long-run fed funds rate,” he said.
While Powell’s dovish sentiment has created some new bullish momentum in gold, the market remains caught in its broader range. In an interview with Kitco News, Philip Streible, Chief Market Strategist at Blue Line Futures, said that he sees further potential for higher gold prices next week; however, it is not without risks.
He added that he is keeping one eye on next week’s Personal Consumption Expenditures Index, as inflation data will remain a key factor in the Federal Reserve’s monetary policy beyond September.
“I think we are going to see a recalibration in the gold market following Powell’s comments, but I don’t know if we will get a breakout just yet,” he said.
Alex Kuptsikevich, Chief Market Analyst at FxPro, said the gold market remains precariously balanced as it trades in the middle of its broader range.
“Gold’s hopes for an aggressive cut in the Fed’s federal funds rate, the associated decline in Treasury bond yields, and the weakening of the US dollar have not yet materialised. The Fed is likely to ease monetary policy in September. However, it may then pause again. Its slowness is bringing investors’ interest back to the greenback,” he said. “The gold chart clearly shows consolidation since April, with the price right in the middle of the 12% range from peak to correction lows. This tedious five-month movement to the right is likely to end in the coming weeks, as August often marks the start of major trends in gold. The duration of consolidation is often directly proportional to the strength of the breakout. From a technical analysis perspective, given the accumulated overbought condition, the downside potential is huge – up to $3,000 or even $2,200 per ounce. However, the upside potential is no less impressive: $4,600 in an extreme bullish scenario, including the Fed switching to a mode of absolute softness.”
Chantelle Schieven, Head of Research at Capitalight Research, said that gold remains well supported but its gains could be limited as September’s rate cut has already been priced in.
“What will get the gold market excited is a change in tone towards more future rate cuts – increased emphasis on the weakening labour market with less emphasis on inflation,” she said.
Commerzbank’s commodity analysts also remain bullish on gold but see limited upside as higher prices affect physical retail demand.
Although gold’s potential may be capped due to limited Fed easing, analysts continue to see opportunity in other precious metals.
Streible added that a lot of news has already been priced into the gold market and, in the current environment, he is turning his attention to silver as it continues to push back toward $40 an ounce.
Silver has managed to outperform gold ahead of the weekend, with prices ending the week at their highest level since September 2011.
“There is a lot of support for gold, which has had a nice run, but silver remains an attractive value play,” he said. “Silver looks good as the Federal Reserve looks to cut interest rates even as inflation remains elevated.”
Economic data to watch next week:
Monday: US New Home Sales
Tuesday: US Durable Goods Orders, US Consumer Confidence
Thursday: US Preliminary Q2 GDP, US weekly jobless claims, US Pending Home Sales
Friday: US PCE Index, personal income and spending
Source: Neils Christensen Kitco
