(Kitco News) – Gold prices are getting a boost from an outspoken dove at the FOMC who may be angling for Powell’s job, and the yellow metal should be bumping up against the April all-time high of $3,500 per ounce in short order, according to Thu Lan Nguyen, head of FX and commodity research at Commerzbank.
“The precious metal received support from dovish comments from the ranks of the US Federal Reserve: Fed Governor Christopher Waller reiterated his view that the Fed should cut its key interest rate as early as July,” Nguyen wrote in a research note. “Overall, he advocates interest rate cuts of 125-150 basis points to bring the key interest rate to a 'neutral' level of around 3%. He pointed to the latest inflation data, which was again moderate despite the US tariffs already in place.”
Governor Waller’s strong dovish stance is unlikely to sway Powell or the more hawkish wing of the FOMC, but it does add a new element of political intrigue at the Federal Reserve.
“Waller's comments have not increased the likelihood of the Fed cutting its key interest rate next week – other FOMC members, including Fed Chair Jay Powell, would otherwise have signaled such a move long ago – but they do increase Waller's chances of succeeding Powell as Fed Chair next year,” he added. “His comments are likely to be well received by US President Trump after all.”
Nguyen said that Waller's willingness to look past any tariff-related price increases suggests that he would also be willing to accept a temporary rise in inflation. “Gold would become significantly more attractive as a result of the depressed real interest rate,” he said. “If other potential candidates for the Fed chair position share this view, the recent record high of around $3,500 per troy ounce is likely to approach quickly.”
Trump has launched a litany of personal attacks against the Fed chair over the past several months, calling Powell a “dumb guy,” a “moron,” a “knucklehead,” and nicknaming him “Mr. Too Late.” The president recently stated that interest rates should be at least 3% lower, which would place them in a range between 1.25% and 1.50%.
The uncertainty surrounding central bank leadership is injecting new volatility into markets, and analysts say this environment will only worsen as concerns about the Federal Reserve’s independence grow.
In a July 17 note, Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank, described the Federal Reserve’s independence as its “superpower.”
“The consequences of such an attack on the Fed’s independence could be dramatic. Not only would the US dollar and Treasuries tumble, but the Fed would lose a superpower: the one that helps it support turmoiled financial markets by buying billions of dollars in US debt,” she said. “Remember, the US—and a few privileged economic zones—are unique in that government bonds can be supported by their central banks purchasing their debt. This is due to credibility. If that credibility is lost, the Fed loses its most important tool. If QE and the Fed’s expanding balance sheet have worked so well over decades, it’s because the Fed enjoys a level of credibility that few others do. If that credibility disappears, lowering rates would severely hurt both the dollar and Treasuries.”
In this environment, Ozkardeskaya advised investors to keep an eye on safe-haven assets, noting, “it looks like we might see some serious action at the Fed this fall.”
Michael Brown, Senior Market Analyst at Pepperstone, said Trump’s actions seems designed to wipe out the central bank’s credibility.
“It appears that the administration is seeking to erode every last shred of monetary policy independence—either right now or via the appointment of Powell’s successor next May,” Brown said in a comment to Kitco News. “Either way, this is going to keep international investors spooked and ensure that reserve allocators continue to seek alternatives to the greenback. Obviously, this is where gold can shine.”
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said he is bullish on gold as the turmoil at the Fed adds to growing geopolitical uncertainty across financial markets.
“If political tensions rise even higher and the Federal Reserve faces more pressure from the White House, the most likely scenario would be increased volatility in the market. Gold, given its past role as a safe haven in times of political and economic volatility, would likely see more use as a store of value,” he said.
Jim Wyckoff, Senior Market Analyst at Kitco.com, also said he expects gold to rally if Trump follows through with his initial threat to fire Powell.
“Trump firing Powell would surprise the marketplace and drive safe-haven demand to gold, which in turn would likely pressure the U.S. dollar index—at least initially,” he said.
After surging back above $3,400 per ounce on Monday, gold has been repeatedly rebuffed at the $3,432 resistance level, but a retest of key support near $3,405 at the North American open on Tuesday also held.
Spot gold last traded at $3,415.19 per ounce for a loss of 0.54% on the daily chart, but the yellow metal is still up 2.17% over the last five days.
