By Barani Krishnan
Investing.com - Gold prices surged to a one-week high on Thursday before falling back as the Federal Reserve failed to reassure markets that it will plow into a new round of asset purchases, even as Chairman Jay Powell pitched a plan to let inflation overshoot before raising rates.
“The Fed’s longer-run goals of 2% inflation on average over time seems more like a fantasy,” Ed Moya, analyst at OANDA said, commenting on the Monetary Policy Framework Review that Powell presented through a video stream instead of in person due to the Covid-19 pandemic.
The policy speech — which otherwise would have been delivered at the Fed’s usual Jackson Hole, Wyoming, venue — said the central bank would attempt an “average inflation target” as it tries to mitigate relatively high unemployment expected for at least a couple of years.
Despite this, Powell did not repeat the Fed’s pledge to continue with asset purchases, a refrain he had stuck to for months as the central bank held rates to near-zero while setting aside more than $1 trillion from its own balance sheet to help steer the economy through the pandemic.
Congressional Democrats, locked in a stalemate with the Trump administration over the next coronavirus economic relief bill, said on Thursday they were ready to resume talks without absolutely committing to a deal.
The combination of the two elements set gold on a roller-coaster ride.
Longs in the yellow metal managed to crack the near-term resistance of $1,980 an ounce — a high since Aug 19 — as Powell started speaking, but were beaten back aggressively by the time he finished by bears who rejoiced at seeing the Dollar Index, gold’s nemesis, reclaim its 93-point handle.
Higher bond yields and an uneven but broadly higher run in equities also put paid to gold’s advance.
At the close, benchmark December gold futures on Comex settled down $19.90, or 1%, at $1,932.60 per ounce, reversing most of Wednesday’s 1.5% gain. The high for the day was $1,986.70 — a peak since the Aug 19 high of $2,015.60. December gold had gotten to nearly $2,090 earlier this month before a sell-off wiped about $160 off the market.
The spot price of gold, which reflects trades in bullion, was hit harder on Thursday than futures on Comex. Spot gold was down $26.88, or 1.4%, to $1,927.33 by 1:42 PM ET (17:42 GMT). The session high was $1,976.66, a peak since the $1,976.66 level set on Aug. 19.
Notwithstanding Thursday’s slide, some still saw gold as a buy opportunity.
“Recall that historical precedents suggest that following a period of extreme momentum, forward returns tend to be skewed negatively with sharp drawdowns and limited upside, suggesting a consolidation period could last for months and that we could still see a deeper pullback,” TD Securities said.
“Looking past these near-term headwinds, however, we expect that the prevailing macro tailwinds will continue to suppress real rates via financial suppression, suggesting that capital will seek shelter in precious metals. This suggests that further weakness in the complex represents a buying opportunity.”