No surprises from Chairman Powell leaves gold traders wanting more

Today traders witnessed one of the more volatile trading sessions, trading in double digits lower, double digits higher and closing lower under pressure.

Today marked the beginning of the annual Economic Symposium sponsored by the Kansas City Central Bank. Due to the pandemic the symposium which is usually held in Jackson Hole, Wyoming was a virtual event. Prior to the event the Federal Reserve made statements conveying radical changes in its approach of achieving its mandate.

This mandate contains two primary goals; first to achieve maximum employment and stable prices, and secondly to maintain an acceptable inflation level, which up until today was 2%. It is the second mandate which the Federal Reserve intended to revamp by raising the acceptable level and thereby reducing worries about inflation overheating.

According to Reuters, “The Federal Reserve on Thursday rolled out a sweeping rewrite of its approach to its dual role of achieving maximum employment and stable prices, putting new weight on bolstering the U.S. labor market and less on worries about too-high inflation. The Fed's new monetary policy strategy, unveiled at the start of an annual central banking conference, pledges to address "shortfalls" from the "broad-based and inclusive goal" of full employment, a nod to research showing racial income disparities hold back economic growth.”

The keynote speech by the chairman of the Federal Reserve, Jerome Powell, contained exactly what many market participants and analysts were expecting to hear. A different and modified approach to its dual mandate, first to achieve maximum employment, and more flexibility by allowing inflation to rise past 2%.

The dramatic shift in monetary policy strategy suggests that the Fed funds rates will remain low for years rather than months. This fact has been made clear on multiple occasions by Federal Reserve members, and did not come as a surprise to market participants and analysts.

According to investing.com, “The policy shift is arguably the biggest for the Fed since Paul Volcker remade the central bank into an inflation-slaying force four decades ago, when prices were spiraling higher. Powell's new policy blueprint, designed for a world where weak inflation, low interest rates, and slow economic growth appear to be here to stay, puts the labor market front and center.”

In his keynote speech Chairman Powell said, “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.” He suggested that the point of the Fed’s efforts across the last six months was not to stimulate the economy but “provide a little bit of comfort” to individuals and businesses.

 “Our response was actually quite different from what it was in the financial crisis, so we could immediately cut rates to zero, we raised our asset purchases essentially without limit to support market function.”

Initially it was assumed that the sweeping changes announced by the Federal Reserve today would reignite bullish market sentiment both gold and silver as a safe haven asset. However, these assumptions proved to be wrong as investors used this opportunity to take profits. This put strong downside pressure on both gold and silver pricing.

Gold futures basis the most active December 2020 contract is currently fixed at $1936.20, which is a net decline of $16.30. Silver futures lost approximately $0.39 and is currently fixed at $27.06. However, it was the volatility and expanded trading range that took some traders by surprise. Gold futures traded to a low of $1914.70 before recovering, and silver futures traded to a low of $26.56 before moving off of these intraday lows.

As reported by MarketWatch, Adam Koos, president of Libertas Wealth Management Group said, “I’m watching it daily, and would like to see another 2 weeks of sideways movement, after which I expect it to head to new, all-time-highs by the end of the year. The most likely catalysts for that move higher would be further weakness in the U.S. dollar and investors using the trade as a safe haven for the uncertainties that will arrive closer to (and after) the Presidential election.”

The truth of the matter is after hearing Chairman Powell convey exactly what many expected. What followed (a steep decline in both gold and silver) was the opposite of expectations.

Wishing you as always, good trading,