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Gold Could See Tapering As Soon As November

By Sunshine Profits (Arkadiusz Sieron)CommoditiesSep 28, 2021 02:43PM ET
www.investing.com/analysis/gold-could-see-tapering-as-soon-as-november-200603325
Gold Could See Tapering As Soon As November
By Sunshine Profits (Arkadiusz Sieron)   |  Sep 28, 2021 02:43PM ET
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It’s Powell’s doing, as always... the Chair signaled that tapering could be announced as soon as next month. What does this mean for gold bulls?

In the latest edition of the Fundamental Gold Report, I covered the FOMC’s newest statement on monetary policy and the dot-plot. I concluded that “gold will struggle until the Fed’s tightening cycle is well underway”. As the chart below shows, the yellow metal has been struggling for the most part of this year, and I don’t expect any shifts from that trend anytime soon.

Now, it’s high time to analyze Powell’s press conference! In his prepared remarks, the Fed Chair offered a rather upbeat view on the US economy:

Real GDP rose at a robust 6.4% pace in the first half of the year, and growth is widely expected to continue at a strong pace in the second half (…) Looking ahead, FOMC participants project the labor market to continue to improve.

Powell also downplayed the inflationary risk. He acknowledged that inflation has stayed at a high level for longer than the Fed expected, but, at the same time, he reiterated the Fed’s view of the transitory nature of elevated inflation:

These bottleneck effects have been larger and longer-lasting than anticipated, leading to upward revisions to participants’ inflation projections for this year. While these supply effects are prominent for now, they will abate, and as they do, inflation is expected to drop back toward our longer-run goal.

However, the question is: why should we trust the Fed’s current inflation outlook, given that its previous forecasts were clearly wrong and underestimated greatly the real persistence of inflation?

Last but not least, Powell offered more clues about tapering of quantitative easing. Although no decision has yet been made, “participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate”. So, my conclusions would be: given that tapering is said to be very gradual, it’s likely that it will start sooner rather than later.

Powell and Gold

Indeed, the Q&A session suggests that the Fed could announce tapering as soon as November. It all depends on whether the substantial further progress test for employment will be met or not. For Powell it is now “all but met”, even though it could happen as soon as the next meeting. After all, many of the FOMC members believe that this test has already been met:

So if you look at a good number of indicators, you will see that, since last December when we articulated the test and the readings today, in many cases more than half of the distance, for example, between the unemployment rate in December of 2020 and typical estimates of the natural rate, 50 or 60 percent of that road has been traveled. So that could be substantial further progress. Many on the Committee feel that the substantial further progress test for employment has been met. Others feel that it's close, but they want to see a little more progress. There's a range of perspectives. I guess my own view would be that the test, the substantial further progress test for employment is all but met. And so once we've met those two tests, once the Committee decides that they've met, and that could come as soon as the next meeting, that's the purpose of that language is to put notice out there that could come as soon as the next meeting. The Committee will consider that test, and we'll also look at the broader environment at that time and make a decision whether to taper.

It seems as though the only condition to be yet fulfilled is that the September employment report has to be “decent”. It doesn’t have to be fantastic, but it can’t be a disaster. Powell says:

So, you know, for me, it wouldn't take a knockout, great, super strong employment report. It would take a reasonably good employment report for me to feel like that test is met. And others on the Committee, many on the Committee feel that the test is already met. Others want to see more progress. And, you know, we’ll work it out as we go. But I would say that, in my own thinking, the test is all but met. So I don’t personally need to see a very strong employment report, but I’d like it see a decent employment report.

Implications for Gold

What does Powell’s press conference imply for the gold market? Well, the Fed Chair sounded generally hawkish. He was rather optimistic about the GDP growth and progress in the labor market. Powell also downplayed risks related to Evergrande’s indebtedness.

And, most importantly, he signaled that tapering could be announced as soon as November, as many FOMC members believe that the substantial progress towards the Fed’s goal has been already achieved. This is bad news for gold prices.

There is, however, a silver lining. There will be no interest rate hikes while the Fed is tapering. So, the real interest rates should stay at ultra-low levels, providing some support for the yellow metal.

Having said that, the dot-plot shows that half of FOMC members forecast the first interest rate hike by the end of next year. As a consequence, the market odds for the liftoff in December 2022 increased from 52.9% on Sept. 16 to 72.7% on Sept. 23, 2021. If the federal funds rate goes the hawkish way, it should continue to create downward pressure on gold prices.

Gold Could See Tapering As Soon As November
 

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Gold Could See Tapering As Soon As November

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Comments (14)
Carl Compton
Carl Compton Sep 29, 2021 12:42AM ET
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Love how the world is just going to behave how the Fed thinks it will… you know, supply chain bottlenecks simply resolving themselves.. inflation up, gold down… not a good sign for gold, but i do believe that the Fed is grossly optimistic on the worlds abiltity to sustain a recovery. Stocks are once again over extended and bonds are looking like a better store of value while the government prints and promotes non-stop inflation and China continues to move away from the gold standard.
Jokers R Us
Jokers R Us Sep 29, 2021 12:10AM ET
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They haven’t even started it but the markets are behaving like they are. Fed doesn’t ever have to do anything just talk.
test tester
test tester Sep 28, 2021 10:19PM ET
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tell that to the negative real interests, hahaha GET F!
Vte Perez
Vte Perez Sep 28, 2021 8:03PM ET
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Damas y Caballeros, como ya saben que ganas tengo de que llege Enero del 2022 para una Basilea III, pero todo es cuestión de tiempo y como ya saben, el tiempo es Oro.
Casino Crypt
CasinoCrypt Sep 28, 2021 7:35PM ET
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he talks to just buy time. if you read the back door conditions that he mentioned ( about 5,6 in total)  , it implies he has no intention of tapering . He has allowed himself more than 1 key to exit the tapering room back door .
Mike Caldera
Mike Caldera Sep 28, 2021 6:51PM ET
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Debt to GDP is at default levels.Any increase in Bond yields will be bought by the Fed to deflate YTM downward 👇 Thus the only way out now is to print and devalue the USD. Gold and silver are they savior of All those who have this metal. Buy as much as you can while you can because this time the world is going to catch on what's really going on.
Frigyes Heinz
Frigyes Heinz Sep 28, 2021 4:54PM ET
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Arkadiusz, is the short or the long term real interest rate more important for gold empitically? Unlike the short term real interest rate, the long term real rate is already rising, as the market positions for tapering. It is rather negative for gold near term.
Heine Pedersen
Heine Pedersen Sep 28, 2021 4:54PM ET
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The idea that sell off in US treasury bonds at this point is bad for PM's .. is mad. And the ones that promote it,will be remembered
Heine Pedersen
Heine Pedersen Sep 28, 2021 4:32PM ET
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https://www.sunshineprofits.com/about-us/company/  Come on.. Seriously??
Heine Pedersen
Heine Pedersen Sep 28, 2021 4:04PM ET
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Sunshine profits is set up by WS banks. To spread nonsense..
Marcin li
Marcin li Sep 28, 2021 4:02PM ET
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Where is Mr. Radomski?! :DD
la popeye
la popeye Sep 28, 2021 3:35PM ET
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powel will never raise int. bcause this will make usa bankrupt.
Paolo Bertozzi
Paolo Bertozzi Sep 28, 2021 3:35PM ET
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indeed, this time debt is out control and interest rate hikes will make it...boom
Heine Pedersen
Heine Pedersen Sep 28, 2021 3:25PM ET
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Very convient this pops up after todays testimonies. Pure manipulation. What was said TODAY was under oath.
Todd Holaday
Todd Holaday Sep 28, 2021 2:50PM ET
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Sometimes the anticipation of an event has much greater effect than when the event arrives. For example, the y2k bug. I think its likey once tapering eventually begins there effect could be nothing or the opposite to gold, yields, dollar, etc. the fluctuations in yields over the last couple of days seem to me already larger than a slow tapering would warrant if it was actually occuring.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Sep 28, 2021 2:48PM ET
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You talk too much. Just let the fed taper, then people will start to identify the need for hedging against inflation. This would be the real test for what is ultimate hedge against inflation. According to economic theory it’s the Almighty gold, it has never been dollar and it will never be:).
Todd Holaday
Todd Holaday Sep 28, 2021 2:48PM ET
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Or you could say the fed talks too much.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Sep 28, 2021 2:48PM ET
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Yeah that’s more truthful
 
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