Gold trends were showing a strong upward movement last week,, but it didn’t quite manage to close above the key $2,500/oz level. But on Monday trading in Asia, it did pop up higher. And it’s a pretty good time to be a gold investor – for now. Gold trends are being supported by a couple of strong tailwinds for the yellow metal, but those winds also have a major risk of coming to a sudden stop, at least in the short term.
The overall path higher for gold is generally traced by lower interest rates. Generally, investors will prefer to invest in bonds over gold, because bonds pay interest. But if inflation is higher than the interest rate, then gold is a better investment option. As interest rates fall, the advantage of bonds over gold diminishes, and the value of the dollar also weakens. That’s how they yellow metal gets a double push to the upside.
What the Market is Waiting For
Gold trends are closely watching the big event this week, of course, the Jackson Hole Symposium. That’s when all the higher-ups at the Fed and other major central banks meet up in a retreat in the vacation town in Montana. It’s often the setting for major changes in monetary policy, which is what the market is banking on happening.
In the lead-up to the event, several FOMC members have been making public remarks about inflation getting under control. That is setting the stage for an expected announcement that the Fed will pivot towards easing, starting at the next meeting in September. The market expects as many as four rate cuts from here to the end of the year, over the course of just three meetings. Which implies that at least one meeting will have a “double” cut of 50bps.
The Fly in the Ointment
That expected easing path could be the problem for gold in the short term. The price has run up in anticipation of rates falling. But the market has developed a really strong habit this year of expecting lots of easing from the Fed that doesn’t materialize. In part, that expectation for so much easing creates the conditions for the easing to not happen. It’s something of a reverse self-fulfilling prophecy, in that the more people believe it will happen, the less likely it will.
We have to remember that the markets initially expected six rate cuts for the year, starting in March. And that was drastically paired back by the Fed. Powell could just as well come out and imply that there will be a rate cut in September, but is more than likely to also heavily imply that the downward track on rates won’t be as sharp as the market expects. Particularly in light of the latest economic data out of the US suggesting that a recession isn’t imminent. Markets could end up being disappointed this week by what comes out of the Fed.
How High Can It Go?
Gold has other factors supporting it, such as inflation not being fully under control just yet. And if the global conditions were to deteriorate once again, gold could return to an upward trajectory. Large gold producers of late have been using their available cash to buy out smaller companies (or trying to, in the case of the failed BHP-Anglo American deal) instead of bringing more production online.
China remains the wildcard after its central bank stopped buying as the price rose. It might mean that central banks – or the central bank buying the most gold – figures the price is too high and will go down in the near future. That implies a staggering global economy with low inflation and low growth, a generally unusual event. The other two options – high growth and inflation, or a recession and low inflation – are much more common and typically support gold prices.