This week, Powell gave a long television interview and a testimony to the Senate. What groundbreaking did he say, and what do his remarks imply for the gold market?
Powell Gives Interview and Testifies
Powell dominated media news this week. On Sunday, the Fed Chair gave an interview to CBS news magazine “60 Minutes,” while on Tuesday, he testified before Congress. What did he say? In an interview, Powell tried to persuade viewers that the Fed has not exhausted its powers to help the economy: “we’re not out of ammunition by a long shot (…) So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to”. But are you really so powerful, if you need convince others that you are powerful?
Implications for Gold
So, Powell does not expect – and we neither – the V-shaped recovery. Actually, Powell said that some sectors of the economy will recover only after the emergence of the vaccine! This is also what we said several times: only vaccine will fully restore the confidence among households, entrepreneurs and investors and without such confidence the recovery of the US economy will not be vivid. The lack of vigorous rebound creates a downside risk for the global stock markets, but it’s rather positive for the gold market.
So far, we claimed that U-shaped recovery (or even L-shaped in some sectors) is more likely. However, there might be also a W-shaped path, a stop-go economy, where the economy swings between contraction and growth, between lockdowns and re-openings, depending on the number of new infections. Such manic-depressive economy should be positive for the gold prices, perhaps even more than the U-shaped recovery, as there is much more uncertainty in the former scenario.
Importantly, Powell’s cautious remarks and worries about the U-shaped or W-shaped recovery could cool stock markets bulls. Over the last few days, we have seen a possibledecoupling of the tandem upside moves in gold and equities, as the chart below shows.
Chart 1: Gold prices (yellow line, right axis, London P.M. Fix) and the S&P 500 Index (green line, left axis) from January 2 to May 19, 2020
The price of gold went further up, while the S&P 500 Index came under pressure and seemingly started trading sideways. It is, of course, yet to be seen, whether the real decoupling will actually occur, but there are no doubts that in case it does, it could be a big (positive) change for the gold market.
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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor
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