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Markets 'want more substance' out of Powell as gold price tumbles $72 in less than an hour

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(Kitco News) Gold's price action once again kept investors on their toes as the yellow metal rallied to a daily high of $1,987 an ounce and then plunged more than $72 to $1,914 an ounce in just under an hour. 

At the time of writing, December Comex gold futures were trading at $1,927, down 1.31% on the day. 

All eyes were on the Federal Reserve Chair Jerome Powell’s keynote address at the virtual Jackson Hole Symposium Thursday morning. 

Powell did not disappoint in delivering major changes to the central bank’s monetary policy approach, including the highly anticipated flexible form of average inflation targeting. 

Under the new approach, the Fed will seek to achieve inflation averaging 2% over time. This means that following periods of inflation below 2%, monetary policy will focus on getting inflation to run above 2% for some time.

“Our longer-run goal continues to be an inflation rate of 2 percent … Our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, 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,” Powell explained.

Another major change was regarding the maximum employment goals, which will now be guided by assessment of shortfalls from maximum employment levels rather than deviations. Powell also stressed that robust job market can be sustained without causing an outbreak in inflation. 

“The significance of Powell’s speech was that maybe we are past this initial hurdle of pumping money and now onto the next phase where we are focusing on building job growth,” RJO Futures senior commodities broker Daniel Pavilonis told Kitco News. “Initially gold spiked on the idea of flexible 2% inflation and interest rates being kept at zero for a longer time. But then the market started to come off when it sounded like Powell started looking at COVID as being more and more under control and looking at the pandemic as being in the rear-view mirror.”

Powell seemed to have kicked off the second phase of the recovery with his speech. “Now, it is about repairing the damage done to the economy. We went from unlimited printing to let’s get people back to work. This is kind of like a second phase,” Pavilonis said.

The selloff in gold was likely triggered because the precious metals markets wanted to hear more from Powell and did not get it.

“Metals wanted more substance out of this. When Powell started talking, it was very bullish for the metals initially but then prices began to decline,” Pavilonis pointed out. “What the central bank is saying now is that they are not going to pump trillion of dollars anymore, they will instead focus on the real economy.”

As long as COVID-19 stays under control, people are going to continue to adopt and realize that there might be more of a scare factor than necessary, he added.

Another element that contributed to gold’s selloff was the market’s interpretation of Powell’s speech as not being dovish enough, said Blue Line Futures chief market strategist Phillip Streible.

“When Powell first said the Fed would allow inflation to run above 2% if needed, market rallied on it. But when Powell said the Fed would not hesitate to act if inflation pressures build, the market interpreted it as the Fed could reverse easing policy measures and that’s why the metals sold off,” Streible told Kitco News. 

Thursday’s close is something to keep an eye on, said Walsh Trading co-director John Weyer, pointing to a lot of new Fed speak confusing the markets. 

“The Fed is looking to treat the labor market a little different. It is now about assessing shortfalls rather than deviations. For the Fed, these changes mean a lot,” Weyer said. “Close will be interesting here. Might be a down a bit on the day.”

Weyer added that this pullback might slow down gold’s rally in the near-term.

Despite Thursday’s decline, the overall picture remains very bullish for gold, Pavilonis pointed out. 

“The market is overall still bullish because of zero percent interest rates for a long time and the flexible 2% inflation target. This means that even if we hit 2%, it doesn’t mean the Fed will start raising rates. That is still really solid conditions for the metals market,” he said. “We are in a fragile state right now. It would not take much to push rates below zero and push into negative yields. And that will ultimately push the metals higher.”

Pavilonis added that he sees these price drops as buying opportunities before gold heads back to $2,000 an ounce again. 

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