Gold prices are poised for third weekly decline

Bloomberg August 28 | Updated on August 28, 2020

A worker handles a 12.5 kg gold ingot at the Uralelectromed Copper Refinery, operated by Ural Mining and Metallurgical Co, in Verkhnyaya Pyshma, Russia   -  Bloomberg

US Federal Reserve’s nuanced stance on inflation has bullion bulls in a tizzy

Gold headed for a third weekly drop as investors weighed the impact of the Federal Reserve’s new approach to setting US monetary policy, with a more relaxed stance on inflation.

Chair Jerome Powell said that the Fed will seek inflation that averages 2 per cent over time, a step that implies allowing for price gains to overshoot. He also noted that “if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal,” the central bank would not hesitate to act.

Bullion swung sharply Thursday as investors parsed the speech delivered virtually for the Fed’s annual policy symposium traditionally held in Jackson Hole, Wyoming. It rallied to an all-time high earlier this month as governments and central banks employed stimulus measures to curb the coronavirus pandemics damage on economies.

“Higher inflation tolerance and low interest rates should see US real yields fall in the medium-to-longer term, which is supportive of gold,” said Vivek Dhar, an analyst at Commonwealth Bank of Australia. “Still, the fact that the Fed will also act if there are inflationary pressures adds doubt to how high US 10-year inflation expectations can reach,” he said.

“The near V-shape rebound in US 10-year inflation expectations since mid-March is at risk of stalling,” said Dhar. “This is negative for gold and has outweighed the Fed’s inflation tolerance comments likely because gold markets weren’t expecting Powell’s intolerance for inflation getting too high.”

Spot gold prices fall

Spot gold fell 0.1 per cent to $1,927.28 an ounce at 8:20 a.m. in Singapore. On Thursday, prices slumped as much as 2.3 per cent.

The Fed’s shift to let inflation and employment run higher may signal that policy makers will keep interest rates low for years to come, lifting the appeal of non-interest-bearing gold.

Gold bulls initially rejoiced the announcement of seeking inflation to average 2 per cent over time, but then quickly came crashing down after noting the inflation overshoots could be moderate, Edward Moya, senior market analyst at Oanda Corp., said in a note. After the longest record long expansion failed to yield inflation, Wall Street is sceptical that the Fed will really see inflation anytime soon even when the economy is beyond the coronavirus.

The inflation dynamics

Since the central bank officially set its inflation target at 2 per cent in 2012, the Fed’s preferred measure of price increases has consistently fallen short of that objective, averaging just 1.4 per cent. That challenge was part of the impetus for the strategy review. Low inflation contributes to low interest rates, which reduces the Fed’s ability to fight off economic downturns — potentially making them deeper and longer.

“While the Fed will likely need to ramp up their asset purchases to support the economy, they didn’t provide any signs that will happen soon,” Moya said. “Gold’s path back to record high territory is still there, it will just take a while longer to get there.”

Published on August 28, 2020

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