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Precious Metals & Energy - Weekly Review and Calendar Ahead

CommoditiesAug 29, 2021 03:57AM ET
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© Reuters.

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.

Precious Metals & Energy - Weekly Review and Calendar Ahead
 

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Comments (6)
Hiep Nguyen Quoc
Hiep Nguyen Quoc Aug 29, 2021 1:54PM ET
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Finally, I've got quite a good buy at 1690 from the crash (and from your reminding that waiting a little more below 1750 just before the crash). Well, if it goes up more profit will come but if it goes down, I will be happier to get another good buy. I assume that we may have several good buys before it heads to 2200 as scheduled ^^
Barani Krishnan
Barani Krishnan Aug 29, 2021 1:54PM ET
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Happy that my tip worked out for you, mate. Bests!
Romeo Roedikie
RomeoRoedikie Aug 29, 2021 11:26AM ET
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Just use QUOTEX platform to trade and make money. Easy to use to make profit faster. Just register your account here quotex.io
Tayba Babli
Tayba Babli Aug 29, 2021 10:39AM ET
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Farzana babli
milena villa escobar
milena villa escobar Aug 29, 2021 10:16AM ET
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Buy gold and hold. Now it's just a matter of when.
John Brannon
John Brannon Aug 29, 2021 9:26AM ET
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Good morning Barani, Powell and some of the other Fed governors place a lot of emphasis on the labor participation rate. It was as high as 67% in 2000, 62% in 2015, and 63% today. I'm surprised that they ignore the effect of entitlements on that rate. For every added entitlement, provided without any requirements, additional potential employees fall out of the number of available workers. If Powell and the others who echo his views were the only votes, and waited for a high labor participation rate, we'd be forever accommodative.
Barani Krishnan
Barani Krishnan Aug 29, 2021 9:26AM ET
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Thanks for that great insight, John. You're right: We'd be forever accommodative at the current rate.
John Brannon
John Brannon Aug 29, 2021 9:26AM ET
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Barani Krishnan  A look at the historic labor participation rate is interesting. From the mid 1960s the participation rate continually climbed (most likely with the societal change of women entering the workplace in greater numbers?) to a peak in early 2000 after welfare reform was enacted by President Clinton and a Republican Congress. Afterwards, falling to a low in 2015 and fairly flat since that time. I think sometimes we investors ignore the perhaps massive economical effects of society. Apologies for the epistle...
Barani Krishnan
Barani Krishnan Aug 29, 2021 9:26AM ET
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John Brannon  Thanks again for digging that up. Wall Street is so myopic as you know; it's all about how much longer the Fed pump will last.
Todd Holaday
Todd Holaday Aug 29, 2021 9:26AM ET
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John Brannon to your point our HR departmnent talked last week about the unprecidented problem with not only finding candidates but with resignations. Appatently it is so wide a phenomina it is being termed on the web, “the great resignation”.
Mubarak Ali
Mubarak Ali Aug 29, 2021 4:55AM ET
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will crudeoil come down or go up???
Wayneyonghua Lu
Wayneyonghua Lu Aug 29, 2021 4:55AM ET
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worse affected #going up, i don't think economic will go up, only the risk, for the next three months, oil remain the same is a gift. gold will touch 1900 or more
Romania Fo
Romania Fo Aug 29, 2021 4:55AM ET
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Wayneyonghua Lu You have telegr. ? because i have analyse for xauusd and i need confirmation for my analyse . thx
Romania Fo
Romania Fo Aug 29, 2021 4:55AM ET
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