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Gold spikes above $1,800 on weaker dollar, sentiment favoring the Fed to back-peddle tapering timeline

Commentaries & Views

A combination of factors resulted in gold spiking strongly higher today, breaking above the key psychological level of $1800 per ounce. Dollar weakness was a strong component contributing roughly 1/3 of today’s strong gains. A disappointing U.S. Manufacturing Purchasing Managers Index magnified the concern that the Delta variant of Covid-19 has slowed down the economic recovery in the United States. And that these concerns over the rising infection rate due to the variant could dramatically cause the Federal Reserve to step back on their timeline to begin to taper their monthly asset purchases of $120 billion of U.S. Treasuries and MBS (mortgage-backed securities).

As of 5:15 PM EST gold futures basis, the most active December 2021 Comex contract is trading $23.60 higher, a net increase of 1.33%, and currently fixed at $1807.80. Concurrently silver futures are trading up 2.31% or $ 0.533, with the most active September 2021 Comex contract currently fixed at $23.64. The U.S. dollar index lost 0.518 points (- 0.55%) in trading today and is currently fixed at 92.99. After hitting a record high for the year last week, the dollar index softened in trading beginning overseas last night.

This brings us to the key upcoming event of the week, which will be the virtual Economic Symposium posted by the Kansas City Federal Reserve Bank. Typically held in Jackson Hole, Wyoming, the symposium will be virtual this year due to rising cases of the Delta variant in the United States. Until recently, Federal Reserve members have been vocal about their belief that it was time to begin tapering their monthly asset purchases. The most aggressive or hawkish of Fed members suggesting that they begin to taper at the end of this year, and more conservative or dovish Fed members looking at Q1 or Q2 of 2022 to begin tapering.

The recent hawkish demeanor of Federal Reserve members came to an apex right after an exceedingly strong jobs report from the U.S. Labor Department, which indicated an additional 943,000 new jobs were added in July. However, the recent invasion into the United States of the Covid-19 delta variant has caused some Fed members to rethink their position on the timeline and magnitude of tapering.

Rob Kaplan, President of the Dallas Federal Reserve bank last week, said that he might “rethink his call for the fed start to taper its 100 billion per month and bond purchases if it looks like the spread of coronavirus Delta variant is slowing economic growth.” The same is true for Neel Kashkari, President of the Minneapolis Federal Reserve Bank. On Thursday, August 19, he said that the “COVID-19 delta variant matters a lot” in the upcoming Federal Reserve debate about when to start to slow down the $120 billion in monthly bond purchases.

Since the beginning of the pandemic in 2020, the Federal Reserve has strongly supported reigniting the economy in the United States with an unprecedented amount of capital allocated each month to provide liquidity through their asset purchases. Chairman Powell stated on numerous occasions that their timeline for tapering and normalizing rates would consistently be data-dependent.

Recently that data has suggested that the Delta variant could stifle or slow down the economic regrowth in the United States. And it is these factors that make Chairman Powell’s scheduled address speech on Friday, August 27, so important. The question investors seek an answer to is whether or not the Federal Reserve believes that they should reconsider their current tapering timeline as expressed in the August 18 minutes of the last FOMC meeting.

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

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.