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Chairman Powell's testimony did not affect gold pricing to any great degree

Commentaries & Views

The chairman of the Federal Reserve, Jerome Powell, today began his testimony to the Senate Banking Committee in regards to the Fed's current monetary policy. In his first day of testimony, he underscored both the positive improvements in the economy, as well as the assumption that the economy in the United States continues to be negatively impacted by the pandemic.

The chairman stated that the accommodative monetary policy, which began when the epidemic became a pandemic, remains fully intact. He also said that Federal Reserve is fully committed to maintaining low-interest rates and quantitative easing through the purchase of $120 billion worth of bonds and mortgage-backed securities per month.

"The Fed will continue this bond-buying, or quantitative easing until there has been "substantial progress" in the labor market and inflation has gotten closer to the Fed's 2% longer-run objective. In fact, the mandate of keeping interest rates at 2% has been updated, allowing the Federal Reserve to let inflation heat up past that target in lieu of achieving the primary mandate of maximum employment.

While many investors and market participants have been actively bidding U.S. equities higher, Chairman Powell conveyed that, "The economy is a long way from our employment and inflation goals."  At the same time, he offered some positive news that the economy is recovering, although this will not change the basic accommodative monetary policy currently in place. His major concern is considered to be on the primary mandate of the Federal Reserve, which is full employment. His statement that there are currently over 10 million Americans still unemployed is an issue that will take time to resolve.

"There are signs that the economy is on the mend from the coronavirus pandemic, but the central bank is likely to keep its easy policy in place for some time." Most importantly, the Fed chairman underscored that a large fiscal stimulus package from the government would not cause problematic price inflation.

On the topic of rising bond yields recently, Chairman Jerome Powell said that "higher yields are really only "a statement of confidence" for an improving U.S. economic outlook."  He tempered the recent rise in bond yields by saying, while we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year".

While the statements coupled with the high probability that lawmakers will and act and pass a robust fiscal stimulus aid package close to the president's proposal that the next aid package cost would be approximately $1.9 trillion, we still have not seen gold react in a bullish manner to this news. Gold basis most active April 2021 Comex contract gave up $2.90 in trading today and is currently fixed at $1805.50. Considering yesterday's dramatic $30 gain, it clearly illustrates underlying support for the precious yellow metal.

However, that is contrasted by the technical studies, which suggest that gold is currently still maintaining a bearish demeanor. His current pricing is well below its 200-day moving average. And recent price action has resulted in a series of lower highs and lower lows. On the positive side is the fact that last week's low of $1760 per ounce not only held but was followed by strong bullish market sentiment taking gold pricing back above $1800 per ounce.

The fact remains that until gold pricing can close effectively above $1850 per ounce, which is where our technical studies indicate there is major resistance, then we could see the market continue to consolidate.

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Wishing you, as always, good trading and good health,

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