The gold market is slightly higher in very quiet trade Thursday morning. Markets may simply be taking a wait-and-see approach to tomorrow’s speech by Fed Chairman Jerome Powell. He is expected to provide some important clues tomorrow about the Fed’s policy plans and may give markets much to think about as they await the next FOMC meeting in September.
To really provide market participants with some useful assistance, Powell’s speech may need to cover some key topics. At the top of the list is when the Fed may be done raising rates. Markets may also want to know when the Fed could elect to reverse course and begin loosening policy again to improve economic conditions.
At the Jackson Hole Symposium last summer, Powell and his colleagues appeared to feel inflation would be transitory in nature. That forecasting error led the Fed to hold off too long on any policy changes. Having waited to begin hiking rates when it should have started with multiple 25-point rate hikes months ago, the Fed now finds itself well behind the inflation curve and having to resort to more aggressive rate hikes such as the 75-point hikes that have been seen in recent months. The Fed could very well hike by another 75-basis points next month to make it three in a row.
The major area of debate in the weeks ahead may be whether the Fed will raise rates by 75 or 50-points. The central bank has shown it does not fear raising rates more aggressively, so a larger hike could again be on the table. If the Fed does hike by 75-points, it could then take a pause and see how its hikes since January are working out as they do take some time to work their way through the economy.
If Powell does not provide any significant cliques regarding policy tomorrow, markets could be in for some volatility and trouble in the weeks ahead. Stocks have come roaring back, which at this point is not at all unusual during a bear market. A lack of clarity from the Fed could, however, put the selling pressure right back onto the market and send equities and risk assets lower. This could potentially boost gold as investors seek out alternatives, but it could also fuel selling in gold as investors may need to cover margin calls and raise cash quickly.
The gold market remains in neutral territory as it awaits the Fed. The $1700 and $1800 levels remain key technical points for the market. Whichever side sees a close above or below it first may win as price action could then continue in that direction for several months or more. The bulls have done a good job thus far of absorbing selling pressure. Whether that turns into bullish price action remains unclear. With the long-term narrative for gold still highly bullish, however, the odds may favor a move higher once the recent trading range is violated.