Gold closes under pressure following a statement by Fed Governor Waller

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Gold is trading under pressure, which will certainly result in gold closing lower on the week. As of 5 PM EST gold futures basis, the most active December 2021 Comex contract is down $13.80 (0.74%) and fixed at $1847. What sparked today’s selling pressure came out of multiple components, but the majority stems directly from a speech by Federal Reserve Governor Christopher Waller.

He spoke to the Center for Financial Stability and expressed a more hawkish tone than any Fed member has in the past few months. While acknowledging that the spiraling level of inflation is much less transitory than first believed and will remain much longer than assumed.

Federal Reserve Governor Waller addressed the current level of inflation and described it as a “big snowfall that will stay on the ground for a while, rather than a one-inch dusting.” His statements highlighted the intrinsic and mounting concern by Federal Reserve members that inflationary rates have gotten way out of hand and added, “When snow is expected to be on the ground for a week, you may want to act sooner and shovel the sidewalks and plow the streets.”

He expressed the need to adjust the tapering process and speed up so that the Federal Reserve can react to inflationary pressures earlier than June, which is when tapering was expected to conclude.

“To me, the inflation data are starting to look more like a big snowfall that will stay on the ground for a while, and that development is affecting my expectations of the level of monetary accommodation that is needed going forward.”

While Waller is a voting member of the Federal Reserve, he is only one member. He is in the more hawkish camp in a divided Federal Reserve. The more dovish Fed members continue to express the current monetary policy of the central bank in regards to his tapering policy should remain intact, thereby waiting until the end of June before adjusting their monetary policy.

Add to that is the uncertainty as to whether or not Federal Reserve Chairman Jerome Powell will be appointed to a second term. President Joe Biden has acknowledged that he will make a decision public as to who will head the Federal Reserve within the upcoming days. Also, President Biden might need to fill as many as four more new Federal Reserve members at the central bank’s seven-member board of governors.

Typically, uncertainty is a solid fuel that will move gold in a bullish manner. However, uncertainty about the voting members of the Federal Reserve and the number of upcoming changes that might occur is unsettling to market participants because a large and dramatic change of voting members creates ambiguities as to how they will proceed with their current monetary policy and plans to normalize interest rates as the economy in the United States rebuilds.

Because their dual mandate and necessary criteria to begin to raise rates is based upon maximum employment and in inflationary rate approximately at 2%. It was the recent shift putting maximum employment as a priority in place of inflationary rates that has backed the Federal Reserve into a corner. Because the only tool in their toolbox that they have available to decrease the inflation that is not transitory is by raising rates.

The Fed will have its last FOMC meeting in mid-December, and before that the PCE inflationary index for last month will be released on November 24. These two events will be critically important in determining the sentiment of the Federal Reserve in regards to its current monetary policy.

Wishing you, as always, good trading and good health,

Gary S. Wagner - Executive Producer