Macro: Sandcastle economics
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Gold update: What to look for in Powell’s speech
Ole Hansen
Head of Commodity Strategy
Summary: Gold and with that also silver's fixation on yield and interest rate developments, will reach a climax later today when Fed chairman Jerome Powell delivers his long awaited speech at the Kansas City Feds virtual Jackson Hole gathering. The duration of the current low interest rate regime and views on inflation will be watched closely.
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Gold and with that also silver’s fixation on yield and interest rate developments will reach a climax later today when Fed chairman Jerome Powell delivers his long awaited speech at the Kansas City Fed’s “virtual Jackson Hole” symposium.
The speech which will have an expected length of 45 minute has been labelled as potentially significant, with central bank watchers poring over Powell’s every word for confirmation of dovish ramifications and clues on the outcome of the year-plus monetary policy framework review.
My colleague Eleanor Creagh posted this update earlier called “Awaiting Jackson Hole”. In it she highlights the key themes to look out from a market and precious metal perspective.
Following a brief period of dollar strength yesterday, which drove gold and silver lower, both managed to find support and bounce from key support levels at $1900 and $26. The recovery was supported by ten year break-even yields reaching a seven-month high while real yields slumped back below -1% to the current -1.06%. At present, the Federal Reserve is widely expected to keep short-term interest rates near zero for five years and the market will be looking for confirmation.
Gold is currently stuck in a tightening range between $1900 and $1955. A break below could see it target $1800 while above the metal could once again be targeting $2000 and beyond.
Inflation and the protection against inflation continues to move up asset managers to-do list. With policy makers having discussed a more relaxed approach to inflation the market will be focus intensely on any comment related to this topic. The Fed’s preferred measure of inflation has consistently fallen short its 2% target, averaging just 1.4% since 2012.
Allowing inflation to rise while preventing bond yields from moving higher would be the Goldilocks scenario for precious metals. It would likely lead to an even bigger drop in the mentioned U.S. real yield, a key source of support for gold and silver in recent years.
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