By Barani Krishnan
Investing.com - To those who know Jerome Powell well, his kicking of the stimulus-taper can further down the road this week will come as no surprise.
Anyone who bet otherwise, thinking the Federal Reserve Chair will show more concern about inflation, might have paid dearly on Friday as the dollar and Treasury yields sank and stocks and gold surged.
The most anticipated Fed event of the year — and, arguably, the U.S. economic calendar — ended with a whimper as Powell proved with his speech to the Jackson Hole Symposium that it’s job creation that matters to the central bank, not price pressures.
With no ambiguity over which of its two mandates the Fed was prioritizing, the focus returns — at least for readers of this column — to what this means for commodities, particularly gold prices.
Well, gold got firmly above the $1,800 level the first time in three weeks — I say "firmly" because the yellow metal has been in the periphery of $1,800 since Monday, while not being there at the same time — but that’s only part of the story.
To really determine where it's going in the near term, we have to await the U.S. August jobs report due next Friday, or Sept. 3.
Why? Because that’s exactly what the Fed will be watching if it is ever going to announce a taper of the $120 billion in combined bonds and agency mortgage‑backed securities it has been buying the past 18 months to insulate the economy from the effects of Covid.
To be sure, Powell zeroed in precisely on employment in his Jackson Hole speech.
More than a year into the COVID-19 crisis, restoring job growth remains one of the biggest challenges of Fed policy makers. More than 21 million American jobs were lost between March and April 2020, at the height of business lockdowns forced by the coronavirus, and roughly 7 million have yet to be refilled, officials say.
"The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test," Powell said. He also stressed on the need to avoid an "ill-timed policy move" amid continued new uncertainties from the Delta variant.
"Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful," the Fed chair added.
Decoded, it meant the Fed would maintain a razor-like focus on the labor market for taper cues.
More importantly, “weekly and monthly jobs data are going to dictate the timing of a rate hike”, said Phillip Streible, precious metals strategist at Blueline Futures in Chicago.
As aforementioned, those who’ve bet correctly on Powell in recent months will know the greater the improvement in U.S. jobs, the more and quicker the chance for a taper. Accordingly, the worse the outlook will be for stock and gold prices. This is one of the ironies of modern-day U.S. economics, where investing on Wall Street is sometimes nothing more than a game involving dart-throwing chimpanzees running on stimulus steroids.
Streible concurs as much, saying: “As a gold and silver investor, you want to see a prolonged recovery in the labor market, leading to a lengthier trajectory of the recent price recovery.”
The July jobs report was the best in a year, adding 943,000 positions after the 1.76 million in July 2020. More crucially, it brought the monthly unemployment percentage — the Holy Grail for a taper — to 5.4% from June’s 5.9%. The Fed definition of “full employment” is a jobless rate of 4%. No one believes we’ll get there, with 4.9%-4.5% being as good as it gets for many.
For now, jobs growth for August is conservatively forecast at 728,000. If, for any reason, the number turns out to be as good as July’s, it could reduce the unemployment gap by another half percent, bringing us into 4.9% territory. That could start the Fed countdown for a taper, with September-October likely to mark the first announcement before what could be followed by a monthly reduction of $10 billion that would bring the stimulus down to nought within a year, if all goes well. And rarely, in our world, anything goes that well.
“If you had not had an opportunity to add to your current position or feel underweighted in Gold, you would need the jobs number to BEAT expectations,” Streible wrote in an outlook published Friday. “That will trigger a minor sell-off in gold as it trades within the probable range of $1819.80 to $1,779.80.”
Conversely, a disappointing job number further extends gold’s rally “to our next major three-star pocket resistance from 1835-1840/oz”, Streible wrote.
The last time gold traded north of $1,830 was in mid-July. If it gets to $1,850, it could easily scale $1,900, setting up a potential return to the $2,000 record highs seen a year ago, if all goes well -- which, again, is rare in our world.
Gold Market & Price Roundup
Gold hit 3-week highs on Friday, notching its best weekly gain since May, after Powell failed to give a clear timetable for tapering U.S. stimulus spending.
The dollar and Treasury yields tumbled while risk assets from stocks to commodities, including oil, rocketed on the move. Gold, while labeled as a safe-haven, got a ride higher too, given its sensitivity to inflation, which typically propels the yellow metal’s prices.
Front-month gold on New York’s Comex settled up $24.30, or 1.4%, at $1,819.50 an ounce, after a three-week high at $1,821.55. For the week, it rose around 2%, its most since the week to mid-May.
The Fed has been buying at least $80 billion in Treasury securities and $40 billion in agency mortgage‑backed securities each month since March 2020 to insulate the US economy from the effects of the coronavirus pandemic measures. The central bank has also kept US interest rates at a record low of between zero and 0.25%.
The question of when the Fed ought to taper its stimulus and raise interest rates has been hotly debated in recent months as economic recovery conflicted with a resurgence of the coronavirus Delta variant.
The Fed’s stimulus program is being blamed for aggravating price pressures in the United States, where economic growth for the second quarter of 2021 was estimated at 6.6 percent on Thursday - above the 3.5% decline noted for all of 2020. The central bank itself has projected economic growth at 6.5% for all of 2021.
The Fed’s preferred gauge for inflation - the core Personal Consumption Expenditures (PCE) Index, which excludes volatile food and energy prices - rose 3.6% in the year through July, its most since 1991. The PCE Index including energy and food rose 4.2% year-on-year.
The Fed’s own target for inflation is 2% per annum.
Aside from the Fed’s asset purchases, the Biden administration has passed $1.2 trillion in COVID-19-related spending since the president took office in January. Democrat lawmakers aligned to Biden this week advanced a further spending plan for $3.5 trillion to advance his economic agenda.
Oil Price Market & Price Roundup
Crude prices finished the penultimate week of August with double-digit gains that overwrote the crash from a week ago, helped by a hurricane watch and Powell’s indecision over the Fed taper.
New York-traded West Texas Intermediate crude, the benchmark for U.S. oil, settled at $68.74 per barrel, up $1.32, or 2%, on the day. For the week, WTI rose 10.3%, eclipsing last week’s 8.9% drop forced by concerns over a Covid resurgence from the Delta variant.
London-traded Brent, the global benchmark for oil, settled at $72.70, up $1.63, or 2.3%. For the week, Brent gained 11.5%, after last week’s 7.7% drop.
For WTI, it was the sharpest weekly gain since September 2020, while for Brent, it was the largest weekly gain since May 2020.
Crude prices rallied as U.S. oil and gas companies raced to complete evacuations from offshore platforms on the Gulf of Mexico as Tropical Storm Ida barreled towards the region before making landfall as a category three hurricane. The gulf houses oilfields that provide about 17% of American oil production. Over 45% of total U.S. refining capacity is also located there.
"The risk of the intensity increasing ahead of making landfall may be supporting prices into the end of the week,” said Craig Erlam, analyst for New York’s OANDA. “Various companies have been removing workers from offshore facilities in anticipation of the storm.”
Oil also rallied as Powell said the U.S. economy was on good footing but still needed stimulus protection from the pandemic.
Energy Markets Calendar Ahead
Monday, Aug 30
Cushing inventory data from surveyor Genscape
Tuesday, Aug 31
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Sept 1
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Sept 2
EIA weekly report on natural gas storage
Friday, Sept 3
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.