Gold is facing a test for direction right now, but could recover from its recent downturn if Jerome Powell, the chairman of the U.S. central bank, announces at the annual Jackson Hole Economic Symposium that the cycle of rising interest rates is nearing an end. The gathering this year promises to be one of the most important in decades, held in a remote ski resort on the Wyoming/Idaho border.
The hints hitting the media right now suggest that Powell might use his keynote speech to assert that rates will continue to rise until inflation is brought under control, possibly leading to another round of increases and a consequent fall in the gold price. This trend is being influenced by attractive real yields on U.S. Government bonds.
If Powell outlines a policy of peak rates this year followed by a decline next year, the demand for gold could surge as investors flock back to this safe-haven asset. This could lead the gold price to re-test the US$2000 an ounce mark it reached in mid-May.
The current level of the 10-year bond, last seen in October 2007, rings alarm bells for investors as it marked the onset of the global financial crisis, resulting in a sharp rise in gold prices. The risk that history might repeat itself cannot be dismissed. If Powell presses too hard on interest rates, the markets might react adversely, adding to the importance of the upcoming commentary.
The advice for investors keen on gold comes strongly from leading U.S. investment bank Morgan Stanley, summarized in a note as “No sleep till Jackson Hole”. The bank's research note titled “Gold: higher yields hurt” highlights two possible future prices for gold: US$1700/oz if bond yields continue to rise or US$2075/oz, a year-end target set by the bank several weeks prior.
What's been suppressing gold's price is the allure of high yields on bonds and bank deposits, particularly the 10-year U.S. Treasury note, which has risen to 4.33%, the highest in 16 years. Meanwhile, gold's price shows signs of recovery, inching back to US$1900/oz after dropping from US$1970/oz at the end of last month.
London-based economist Mohamed El-Erian, an influential voice in the financial world, weighed in in a recent interview, and doesn't think we will see a major policy shift at the Jackson Hole meeting. He see three possible approaches that Powell might take, ranging from an imminent policy change to limiting himself to narrow issues with no immediate policy implications. El-Erian recommends the latter, advocating for the continuation of the current policy to drive inflation back to a 2% annual target. If he's correct, the gold price could fall as Morgan Stanley warned.
This week's symposium is crucial due to the differing opinions in the market, making it the biggest economic event since disruptions caused by Russia's war in Ukraine and the Covid crisis. Research notes such as a recent one from Wilsons, a local investment bank, might provide clues to the future direction of interest rates. Wilsons expects U.S. yield ascent to retrace over the coming months as inflation eases and growth cools.
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