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Gold Prices Briefly Spike Higher Following Comments From Fed Chair Jerome Powell

Kitco News

(Kitco News) - Gold prices briefly spiked higher Tuesday morning following what the markets have deemed as dovish comments from Federal Reserve Chairman Jerome Powell.

In his opening remarks at a monetary policy conference in Chicago, Powell said raised concerns about the rising trade tensions in the U.S., saying that the central bank is closely monitoring the issue.

"We do not know how or when these issues will be resolved," he said. "…As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective."

Gold prices jumped immediately higher following the release of Powell's opening statement. However, the move was short-lived and prices are back down to relatively neutral levels. August gold futures last traded at $1,328.40 an ounce, relatively unchanged on the day.

Royce Mendes, senior economist at CIBC Capital Markets, said that the comments from Powell add to the growing market whispers of impending looser monetary policy.

"Since the last Fed meeting on May 1st, trade tensions have increased, causing concern among many officials that the outlook could warrant a rate cut if economic data deteriorate as well," he said. "… Today's commitement from Powell is the strongest indication that his level of concern has increased in recent weeks. The speech only devotes one paragraph to the current situation, with the rest focused on Fed's strategy, tools and communications. Still, it was enough to see yields fall after the text was released."

According to some economists, growing trade tensions, particularly the new tariff threats against Mexico could weigh on growth and tip the U.S. and global economies into a recession. Markets expectations for looser monetary policy has grown sharply in the last few sessions.

The CME FedWatch Tool shows that markets are pricing in a 51% chance that the U.S. central bank could cut rates as early as July. In total markets see an increasing likelihood of three rate hikes by the end of the year.

U.S. bond yields continue to trade near a two-year low as the chorus for rate cuts grows stronger. According to commodity analysts, this is a perfect environment for gold as lower bond yields, pushing real interest rates lower, reducing the yellow metal's opportunity costs.

“Powell opened the door here to a rate cut but only if the trade war continues or escalates. He's basically telling the market that cuts will come if there is more trouble. The market might have wanted something a bit more explicit...,” he said.

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