Gold price and silver price explode ahead of Jackson Hole, here’s what to expect from Powell’s speech

(Kitco News) After a poor start to the week, the precious metals sector is rebounding as markets continue to calibrate for Federal Reserve Chairman Jerome Powell’s keynote address at the Jackson Hole symposium.

Gold and silver rallied impressively on Tuesday as the US dollar index retreated from 20-year highs and bargain hunters arrived after last week’s selloff.

At the time of writing, December Comex gold futures were trading at $1,764, up 0.90% on the day. And September silver futures were at $19.10, up 0.94% on the day.

The big catalyst for precious metals and the markets this week is Powell’s speech at the Jackson Hole meeting on Friday, which so far has only a fictional title – “Economic Outlook”. But the main theme of the symposium will be “Reassessing Constraints on Economics and Politics.”

“[The theme] suggests focusing on the supply side of the economy… As pressure on global supply chains eases, this implies that a reduction in inflation could now be achieved with a relatively modest relaxation in demand. This is an essential basis for our view that a recession can still be avoided in the coming quarters. The Fed is clearly hoping for a similar outcome, and officials may try to bolster this case next week,” said Andrew Hunter, senior U.S. economist at Capital Economics.

The US dollar and US Treasury yields continue to be the main drivers for gold. Each time they rise, gold retreats, while any decline triggers a rally in the precious metal.

“The dollar continues to derive great strength from risk aversion and fears that the Fed will reaffirm its hawkish message this week,” said Lukman Otunuga, senior research analyst at FXTM. “If Powell bolsters expectations around the Fed with another giant rate hike in September and further tightening to come, that could boost the dollar. Alternatively, a cautious Powell expressing concerns about the US economic outlook could dampen the odds. moves, weakening the dollar.”

Markets remain divided on whether the Fed will raise rates by 50 or 75 basis points at its September meeting. The CME’s FedWatch tool shows a 51.5% chance of a 50bps hike and a 48.5% chance of a 75bps hike.

What will Powell say?

The Fed is known for using the Jackson Hole symposium to signal major changes in monetary policy. However, this time around, analysts don’t expect any substantial change as Powell will want to give the Fed maximum flexibility ahead of the September meeting pending another round of jobs and inflation numbers.

“We don’t think the Fed will paint itself into a corner ahead of the September 20-21 FOMC meeting. Rather, we expect the Fed to try to manage market expectations in Jackson Hole,” Win Thin said, responsible for BBH’s global currency strategy.

So far, the Fed has been consistent enough to remain hawkish despite some mixed signals from the latest Fed meeting minutes released last week. Minutes from July’s FOMC meeting showed Fed officials agreed on the need to slow the tightening cycle eventually, but believed the Fed needed to first see how rate hikes had an impact on inflation.

Worries over another oversized Fed hike amid growing recession fears are eroding risk sentiment in the market, which should benefit gold.

“There is a strong sense of unease in financial markets as investors grapple with inflation concerns, concerns over US monetary policy tightening and recession fears. It will be a big week for investors. markets through the annual Jackson Hole Economic Symposium where central bankers and heavyweight financiers gather to discuss major economic issues,” Otunuga noted.

The big lesson everyone is looking for is additional insight into the Fed’s thinking on inflation, the economy, and the future of monetary policy. “What Powell reveals during the speech or chooses to hold back could set the tone for global markets in the weeks to come,” Otunuga pointed out.

Powell will likely reinforce his hawkish stance on Friday and revisit some of the markets’ new thinking around a potential Fed pivot, analysts said.

“[The Fed chair] is expected to reiterate its determination to keep rising to rein in prices, where it can send a clear message that even though they have a slower pace of rate hikes, they may not be quick to pivot and cut rates “said MKS PAMP Head of Metals Strategy Nicky Shiels.”If very few in the US government actually believe we are in a recession (with changed definitions), then how can you justify a pause in rate hikes if there’s just no recession?”

It is also widely expected that the Fed Chairman will try to be as straightforward as possible when opposing the Fed pivot idea.

“He can try to send a clear message that even if they have a slower pace of rate increases, it won’t signal a lower peak rate or that they’ll be quick to cut rates,” explained Edward Moya, Senior Market Analyst at OANDA. “After this week, Wall Street shouldn’t be surprised if fed funds futures start pricing in rate hikes for next year. This could be the week many return from vacation and double down on their rally calls. of the bear market.”

Expect More Gold Price Volatility

Analysts are divided on where gold is headed, but they are confident the precious metal will be highly volatile this week.

“The precious metal’s volatility potential is high this week, with remarks from Jackson Hole and Powell potentially acting as a new fundamental spark for gold. If prices are able to clear $1,724, a selloff towards 1,700 $ is on the cards. Alternatively, a move back above $1,752 could pave the way towards $1,770 and $1,800, respectively,” Otunuga added.

Any dovish surprise could spark a rally in gold, Shiels added, citing favorable tactical positioning.

“Structurally, the precious market remains either flat or short precious, while tactically, asymmetric risks are clearly building in September, ie: short positioning + seasonal upside + low price + dovish Powell (vs. market expectations) could be a bullish setup/reversal later this week or next week after Jackson Hole,” she said.

On the other hand, an aggressive Fed would mean a lower price floor for gold in the fall, Moya noted. “Gold will eventually settle in a trading range, but it looks like the bottom could be a bit lower as energy and food inflation risks could keep the Fed aggressive with rate hikes in the new year. “, did he declare. “Gold looks set to stabilize above the $1,750 level before we hear from Fed Chairman Powell on Friday.”