(Kitco News) – Sentiment is once again shifting in the gold market and after two weeks of consolidation analysts and investors are once again talking about the $2,000 an ounce level.
If you are wondering what is behind this new found optimism and momentum you have to look no further than the Federal Reserve’s announcement of a major shift in its long-term monetary policy stance. In his highly anticipated speech at the annual Jackson Hole Symposium, Federal Reserve Chair Jerome Powell basically said that the central bank is going to sacrifice inflation and focus on rebuilding the labor market.
Okay, maybe his message was a little bit more nuanced. In his speech he said: “Following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
As for the labor market, he added: “In conducting monetary policy, we will remain highly focused on fostering as strong a labor market as possible for the benefit of all Americans.”
The gold market took Powell’s comments to mean that the Federal Reserve is going to let inflation run hot, which will push real bond yield, which accounts for inflation, deeper into negative territory. This is the perfect environment for the gold market.
Of course, being the Fed Chair, Powell had to muddy the waters a little bit. In the question and answer portion of his presentation, he walked back some of his dovishness and said that he expects inflation would only be moderately above 2% and that they would be quick to act to bring inflation back down.
As you can expect gold investors heard those words and within an hour the price of the precious metal dropped $72.
And that brings us to today, where gold has recouped its losses and is heading into the weekend with a nearly 2% gain Friday.
Many analyst have said that they are looking through the Federal Reserve’s latest messaging and instead focusing on the current economic environment. The global and U.S. economies continue to feel the effects of the COVID-19 pandemic. The reality is that with millions of people unemployed, U.S. interest rates will remain low for the foreseeable future and at some point the Federal Reserve is going add liquidity to the system.
Many analysts the Kitco News team have talked to said that you can’t find a better environment for gold.
So on that note, have a great weekend.
