Powell Testimony Propels Gold Above $1,400 - the Countdown to July's FOMC Is On / Commodities / Gold & Silver 2019

Hot Wednesday is behind us. We had both the Powell’stestimony to the Congress and the released minutes from the latest FOMCmeeting. The biggest yesterday’s winner is clearly gold. If you would like toknow why – and what situation the yellow metal is in currently – we invite youto read our today’s article!

Powell Failsto Push Back Against Market Expectations of Rate Cut in July

What a day! Gold is back above $1,400, as one can seein the chart below. What happened exactly?

Chart 1: Gold prices (London P.M. Fix, in $) in 2019.

First of all, Powell testified yesterday before theCommittee on Financial Services, U.S. House of Representatives. What didhe say? In his prepared remarks, Powell noted that the economyperformed reasonably well over the first half of 2019, while the labor marketremained healthy. The Fed’s basic outlook is still for economic growth toremain solid, labor markets to stay strong, and inflation to move back up overtime to the Committee’s 2 percent objective.

But it were notthese comments that sent gold above $1,400. Powell also stressed that

uncertaintiesabout the outlook have increased in recent months. In particular, economicmomentum appears to have slowed in some major foreign economies, and thatweakness could affect the U.S. economy. Moreover, a number of government policyissues have yet to be resolved, including trade developments, the federal debtceiling, and Brexit. And there is a risk that weak inflation will be even morepersistent than we currently anticipate.

Instead of focusing on hard data, Powell emphasized crosscurrents. Apparently, the recent trade trucebetween China and the U.S. did not impress him. He also downplayed a rebound in consumerspending during spring and a surge in nonfarmpayrolls in June that eased worries afterpoor employment in May. Despite all the positive economic reports publishedrecently, Powell basically said that nothing has improved since the June FOMCmeeting:

Since then,based on incoming data and other developments, it appears that uncertaintiesaround trade tensions and concerns about the strength of the global economycontinue to weigh on the U.S. economic outlook. Inflation pressures remainmuted.

In Tuesday’s Gold News Monitor, we wrotethat “because of the Wall Street's addiction to loose monetarypolicy, the FOMC could beforced to cut the federalfunds rate at its next meeting.” Powell’s testimony confirmed our assessment.Although the recent U.S. economic data does not justify the move, Powell didnothing to change the market expectations and discourage traders fromanticipating an interest-rate cut later this month. But he did encourage the gold bulls to enter the trading floor, that’s forsure!

FOMC MinutesPresent Several Reasons for Interest Rate Cut

Wednesday was a big day. Apart from Powell’stestimony, later in the day the minutes of the latest FOMC meeting hit the tape. Just as Powell’searlier comments, the minutes were dovish.

This is because participants generally agreed that“downside risks to the outlook for economic activity had risenmaterially since their May meeting” and that “the economy appeared to have lostsome momentum”. Consequently, many Committee members indicated that “the casefor somewhat more accommodative policy had strengthened”.

And now a long but key passage, which clearly showsthat the Fed is prepared to cut interest rates this month:

Participantswidely noted that the global developments that led to the heighteneduncertainties about the economic outlook were quite recent. Many judged additional monetary policyaccommodation would be warranted in the near term should these recentdevelopments prove to be sustained and continue to weigh on the economicoutlook. Several others noted that additional monetary policy accommodationcould well be appropriate if incoming information showed further deteriorationin the outlook. Participants stated a variety of reasons that would call for alower path of the federal funds rate. Several participants noted that anear-term cut in the target range for the federal funds rate could help cushionthe effects of possible future adverse shocks to the economy and, hence, wasappropriate policy from a risk-management perspective. Some participants alsonoted that the continued shortfall in inflation risked a softening of inflationexpectations that could slow the sustained return of inflation to theCommittee's 2 percent objective. Several participants pointed out that they hadrevised down their estimates of the longer-run normal rate of unemployment and,as a result, saw a smaller upward contribution to inflation pressures fromtight resource utilization than they had earlier. A few participants wereconcerned that inflation expectations had already moved below levels consistentwith the Committee's symmetric 2 percent objective and that it was important toprovide additional accommodation in the near term to bolster inflationexpectations. A few participants judged that allowing inflation to run above 2percent for some time could help strengthen the credibility of the Committee'scommitment to its symmetric 2 percent inflation objective.

The whole litany of reasons! Everyone can pick up ajustification to suit their taste! Let’s make the long story short. Rather thanweaker U.S. data, the main motivationsfor the upcoming interest rate cut is subdued inflationarypressure and aninsurance against downside risks.

Implicationsfor Gold

Powell had probably the last chance to push backagainst the market expectations of an interest rate cut this month. Maybe heknew that it would be pointless, given the dovish minutes of the latest FOMC minutes. As the FedChair beat expectations on a dovish side, goldprices rose to their highest in over a week.

But what’s next for the yellow metal? Well, gold hasbeen quite volatile recently, moving around $1,400. While it takes a lot morefactors to consider and charts to interpret in order to make a gold price prediction, isolatingthe FOMC run-up periods shows a tendencyfor gold prices to rise heading into the FOMC – and that applies also to themeeting at the end of this month.

The more distant future is not all clear cut, yet gold finds itself in a more positiveenvironment fundamentally, translating into fewer headwinds. The interestrate cut would work to ease upward pressure on the U.S. dollar, stimulatingdemand for gold. Moreover, the Fed’s move should add to the recession fears. Ifeverything was rosy, the U.S. central bank would not reduce interestrates. Such worries should drive investors to safe havenssuch as gold.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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