Gold Down Ahead of Powell

By Barani Krishnan

Investing.com – Gold prices fell on Thursday, but remained above the key $1,500 level, as seemingly thin Fed appetite for a rate cut knocked some bullish wind out the yellow metal.

A day before Fed Chair Jay Powell’s speech to the annual Jackson Hole Economic Policy Symposium, bets were growing that the central bank would not resort to another round of rate cuts to add to July’s 25-basis point reduction.annual Jackson Hole Economic Policy Symposium.

Spot gold, reflective of trades in bullion, was down $2.31, or 0.2%, at $1,500.24 per ounce by 2:22 PM ET (18:22 GMT). Bullion has occasionally moved back and forth between $1,500 this week as some investors bet the Fed wouldn’t add to its dovish tone ahead of its closely-watched Aug 22-24 Jackson Hole, Wyo. conference.

Gold futures for December delivery, traded on the Comex division of the New York Mercantile Exchange, settled down $7.20, or 0.2%, at $1,508.50 per ounce in post-settlement trade.

Rate cuts weaken the U.S. dollar, making commodities priced in the greenback cheaper for the rest of the world. Dollar-denominated prices of raw materials such as oil often automatically rise after a rate cut, adjusting to the phenomenon.

Expectations have been heavy since the start of the week that Powell’s speech at Jackson Hole on Friday would provide clues as to when when the central bank will cut rates again – after its 25-basis point reduction in July.

The Fed chair is under immense pressure from President Donald Trump to announce a full percentage point cut in rates or something as substantial to deliver a major boost to Wall Street and other markets. But most economists also expect Powell to uphold his independence and ignore the president.

Hopes that the Fed would go down the path of monetary easing again were partially dashed on Wednesday after the central bank’s minutes at its July meeting, where it cut rates for the first time in a decade, suggested the action was an one-off move.

Some gold traders still expect the Fed to cut interest rates by another 25 basis points at its next meeting in September. But the July meeting minutes released on Wednesday showed a clear division of opinion, with two policymakers voting against the last rate cut, while “a couple” called for a larger 50 basis point cut.

“The global environment has clearly deteriorated since the July FOMC meeting and market participants are still hoping for a more pronounced dovish shift, possibly at this week's Jackson Hole symposium,” Petr Krpata, strategist at ING, said in a note.

Speculation that Powell could disappoint markets at Friday’s appearance has been on the rise.

While non-yielding bullion is generally considered to benefit from lower rates, Jeffrey Halley, market strategist at Oanda, said Powell may not need to signal multiple rate cuts to support gold prices.

“Gold could be a significant beneficiary of a Powell disappointment tomorrow, with the resulting stampede out of bullish equity and rates trades potentially benefiting haven assets,” he said in a note.

Ole Hansen, head of commodity strategy at Saxo Bank, repeated his bullish call on gold with a target of $1,585 due to numerous factors including a mountain of negative-yielding bonds, the ongoing trade dispute between the U.S. and China, and continued central bank buying.

“In the short-term however, the elevated long remains a challenge with the market in need of a catalyst to send it higher, in order to avoid the temptation from recently-established longs to book some profit,” he said in a note.

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