Gold futures are moving higher on Thursday as the U.S. dollar weakens versus a basket of international currencies. However, gains are limited by constant U.S. Treasury yields.
Today’s U.S. economic data could influence the direction of interest rate expectations, despite the fact that most prominent market participants have taken a back seat in anticipation of Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday.
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At 06:31 GMT, gold futures for December trading at $1771.80, up $10.30, or +0.58%. The SPDR Gold Shares ETF (GLD) closed Wednesday at $163.27, up $0.50 or +0.31%.
The Fed Chair and Monetary Policy
Friday’s speech by Federal Reserve Chair Jerome Powell at the Jackson Hole central bankers’ meeting will have the most immediate impact on the gold market’s price action.
If Powell indicates the need for rapid rate hikes, gold sellers should return to the market, as rising interest rates increase the opportunity cost of owning non-yielding bullion. In addition, increased interest rates should make the U.S. dollar a more appealing investment. A rising dollar is also detrimental to gold demand since it increases the price of the precious metal for overseas buyers.
Powell will likely also discuss the possibility of a U.S. recession. This is where his words could become somewhat problematic. By discussing the prospect of a recession, Powell leaves the door open for a future policy reversal by the central bank if the upcoming consumer inflation, employment, and business activity reports indicate a weaker economy. Before the Fed’s upcoming two-day meeting on September 20-21, all of these reports will be available.
Powell Must Communicate with Clarity and Enthusiasm
Regardless of the direction Powell takes in his speech, gold investors will expect it to be delivered with clarity and conviction. Powell must be unequivocal in predicting the direction of interest rates and the likelihood of a recession. If he wavers in his principles, he jeopardizes the Fed’s credibility, which it has been attempting to regain since last summer, when it termed increasing inflation “transient.”
Powell’s lack of clarity and conviction is likely to increase market volatility since it indicates he is allowing market participants to choose the path of interest rates and the likelihood of a recession.
The most detrimental thing Powell could do for gold prices would be to call for aggressive rate hikes to battle inflation while highlighting a modest recession and the Fed’s ability to provide a smooth landing.
While most eyes will be on Powell’s speech, some will also be on the 12:30 GMT release of the U.S. GDP estimate.
The GDP report is anticipated to be of particular significance because it serves as a leading indicator of recession. The initial report indicated a 0.9% decrease. The forecast for today’s report is a little improvement to -0.7%.
A GDP result that is worse than anticipated could be the cause of volatility today, especially if volume is below typical. It will also spark a dispute over whether the U.S. economy is in a recession, which might influence whether the Fed continues with its aggressive plans to reduce inflation.