With risk sentiment clearly on the rise, positive news about TRADE between the U.S. and China and the development of vaccines, spot gold briefly lost its crucial support to the $1,920 level that had been a multi-year record. Now, the focus is turning to Thursday’s speech by Federal Reserve Chairman Colin Powell at the Jackson Hole central bank meeting, which could spark a fundamental shift in fundamentals that could have a profound impact on gold, the dollar and other moves.
Gold briefly lost key support in 1920
For now, the risk sentiment is more positive, after positive news on us-China trade and vaccine development, and the strong demand for risky assets.
U.s.-china trade: Senior U.S. and Chinese trade officials on Tuesday reaffirmed their commitment to the first phase of a trade agreement and discussed how China could increase its purchases of U.S. goods, supporting financial markets.
As frictions between China and the US continue to escalate, it is crucial for both countries and even the whole world to resume dialogue mechanisms in a timely manner. In fact, it appears to be the only institutional channel for dialogue between the two countries.
Recent statements by Chinese and American officials indicate that both sides are willing to continue cooperation on economic and trade agreements. Larry Kudlow, a senior White House economic adviser, said in recent days that the Trump administration was pleased with the pace at which China was making good on the trade deal and buying American goods.
Kudlow added, “While we have significant differences with China on other issues, we are working on the first phase of the trade agreement.”
Vaccine Development: Astrazeneca has begun trials of its novel Coronavirus antibody-based treatment and prevention drug, the latest development in the global fight against the virus.
The Financial Times has previously reported that the US Food and Drug Administration is likely to grant Astrazeneca emergency use authority (EUA) in October for vaccines developed and licensed by Oxford University.
On the back of good news, the S&P 500 and the Nasdaq index set new closing records yesterday, while spot gold continued its retreat from the key $1,920 mark, a multi-year record.
“We are mildly optimistic about the U.S.-China relationship, and there is a certain novel Coronavirus (therapy) emerging. As a result, there has been less safe-haven demand, “said David Meger, head of High Ridge Futures metals trading.
The heavy risk is approaching!
Now, the focus shifts to Thursday’s speech by Federal Reserve Chairman Colin Powell. The Jackson hole annual meeting of the world’s central Banks will be held online on August 27 solstice 28, when the world’s central bankers will speak on economic policy. The theme of this year’s conference is “Looking at the Decade Ahead:Implications for Monetary Policy.”
The Jackson Hole annual meeting of global central Banks is known as a “barometer” of policy inflection points. On Thursday, Federal Reserve Chairman Colin Powell will deliver a speech titled “Review of the Monetary Policy Framework.”
It was Mr Powell’s first public appearance since the Fed’s policy meeting in late July, and investors have been waiting for the central bank to release details of a possible change in its inflation target.
Investors will also be watching closely for details on how the Fed intends to change its inflation target, as well as for further thinking on changes to the Fed’s framework. All these details hint at how long the Fed will stick with its aggressive, super-easy stimulus this time round.
Tom Graff, head of fixed income at Brown Advisory, further noted that expectations for meaningful clues from Powell’s speech are ‘quite high,’ and ‘it could well be a historic speech.’
In particular, Mr Powell is likely to mention the term “average inflation target” — that is, the Fed will allow inflation to rise above its 2 per cent target for a period of time if inflation stays below that level for a long time.
‘Mr. Powell will likely provide a broad outline of the considerations and reasons behind the committee’s review process,’ says Roberto Perli, a partner at Cornerstone Macro In Washington, a former Fed economist. Then he might conclude by referring to the committee’s consensus that inflation should be allowed to exceed the limit a little, which is the concept of average inflation.”
Td securities said it expected Mr Powell to effectively announce the outcome of the review of the monetary policy framework, recommending the formal adoption of average inflation targeting. Precious metals may be supported by the Fed changing its forward guidance and explicitly proposing inflation above 2 percent.
“We believe Chairman Powell will take meaningful steps in his speech on Thursday to ease the inflation target at the Fed’s next policy meeting in September,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote. Guha and his team expect the Fed to seek moderate “inflation overruns” during the recovery and avoid “Japanization” of the US economy, characterized by low inflation and slow growth for an indefinite period of time.
“A possible dovish shift in Fed policy should now be fully priced in, which should limit further dollar declines,” said Lee Hardman, currency analyst at MUFG. As the latest minutes of the Federal Open Market Committee show, there is also a risk that the dollar will rise if Chairman Powell says anything to disappoint the market’s dovish expectations.”
Lee Hardman, currency analyst at Bank of Mitsubishi UFJ in Tokyo, said the Fed’s more dovish tone this week had been widely priced into the market, so dollar weakness would be limited. “With the Release of the Fed’s July minutes, there is some risk to the dollar’s upside if Powell disappoints dovish markets this week.”
Neal Kimberley, a senior economist in New York, said the dollar index has seen a sharp sell-off in recent months, but a lucky turning point is likely imminent.
As Mr Powell prepared to speak, the dollar held firm above the 93 mark, while spot gold continued to come under pressure after three days of losses, once again approaching the crucial 1920 mark, which had been a multi-year record.
Ole Hansen, head of commodity strategy at Saxo Bank, said the gold market needed a consolidation in the short term after its strong rally. Hansen said gold is currently trading down to support 1920, with upside resistance at $2,015 an ounce.
It is worth mentioning that the gold and silver head has shown signs of “flight” before the heavy risk hit.
According to ETF position data, silver bulls appear to have fled the harbingers. Holdings in the iSharesSilverTrust, the world’s largest silver ETF, fell an impressive 144.79 tonnes on August 25 from the previous day to 17,762.41 tonnes. Meanwhile, holdings in the SPDR Gold Trust, the world’s largest Gold ETF, were down 3.51 tonnes, or 0.28 percent, from 1,248.87 tonnes.