(Kitco News) Gold market price action is taking a breather following hawkish commentary from Federal Reserve speakers, with prices moving further away from the $1,800 an ounce target.
Gold prices jumped to a daily high of $1,805 an ounce on Tuesday morning as House Speaker Nancy Pelosi landed in Taiwan amid heightened geopolitical tensions, amid threats of “serious consequences” from China for her visit.
However, gold gave back all of its daily gains after aggressive rhetoric from the Fed, with December Comex gold futures last trading at $1,777.10, down $10 on the day.
“Gold pared gains after Wall Street became optimistic that tensions between the world’s two largest economies would get out of hand,” said Edward Moya, senior manufacturing analyst at OANDA. “A stronger dollar is weighing on gold as the greenback’s pullback over the past two weeks appears to be over.”
Chicago Fed President Charles Evans said Tuesday that the U.S. central bank will continue to use sizeable rate hikes until it sees inflation slowing. Evans said he is not ruling out a 50-basis-point hike in September.
“If you really think things are not improving … 50 (base points) is a reasonable assessment, but 75 might be right. I suspect more will be called for,” he told reporters on Tuesday.
Speaking on Tuesday, San Francisco Fed President Mary Daly said inflation is still a problem. The Fed has “a long way to go” before reaching its price stability goals, especially after June’s inflation rate accelerated to 9.1% from a year ago, Daily said in an interview on LinkedIn. “We are still determined and fully united,” he said.
Everything is data-dependent, Dolly said, echoing Fed Chair Jerome Powell’s remarks from last week. “I’m really looking to see if we can slow down the pace of rate hikes a little bit or what that data tells us if we should continue,” Daly said.
Evans and Daly are not voting members this year, but their comments reveal some behind-the-scenes thinking.
The hawkish comments came after the US central bank raised rates by 75 basis points last week for the second time in a row. At the time, Powell said the U.S. was not in recession, meaning another “unusually large” rate hike could be in store in September, after which tightening would slow.
“I don’t think the US is currently in a recession. Several sectors of the economy are doing very well. I would point to a strong labor market. [It is] It is true that growth is slowing down… [But generally]GDP numbers [are] Revised quite significantly. You tend to take the first GDP reports with a grain of salt,” Powell said, referring to the first reading of the Q2 GDP report.
Data-wise, signs still point to problematic inflation numbers and a slowing economy.
This week, markets are still digesting the Fed’s preferred inflation gauge — the personal consumption expenditures price index — which rose 6.8%, the most significant annual increase since the 6.9% posted in January 1982.
Also, US second quarter GDP shrank by 0.9%, marking the second consecutive quarter of contraction and meeting the technical definition of a recession.
Powell said that going forward, he wants to make decisions by meeting and refrain from providing clear guidance on the exact magnitude of upcoming rate hikes. Two more inflation and labor data reports will be released before the September Fed meeting.
For gold, Moya noted that the strong US dollar will continue to be an obstacle to higher prices.
“The US dollar got a major boost as the latest round of Fed speak supported the idea that the interest rate differential will remain wide in the dollar’s favor,” he said. “Geo-political shocks could mainly draw safe-haven flows into Treasuries and that would support the dollar. Gold is once again trying to become a safe-haven, and that should allow us to learn quickly if this latest round of international risks is anything to go by.”
According to strategists at TD Securities, for gold to see a significant change in trend and a sustainable bull rally, the precious metal would need to trade above the $1,800 per ounce level.
“The prevailing risk-off tone in the market linked to US-China relations has further supported the yellow metal through modest bearish flows,” he said on Tuesday. “Nevertheless, for further significant short covering by CTA trend followers to take place, gold prices would need to close north of $1,820/oz to trigger a change in trend signals… We see the risks of Fed speakers pulling back against market expectations for the Fed pivot. In this sense, gold markets have seen a massive pullback from supportive traders. Faced with complacent lengths, it still holds the title as gold’s dominant speculative force.”
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