Gold enters September on a dreadful run after August’s drop made it five monthly declines in a row, the precious metal’s worst performance in four years.
As such, gold starts a new month trading close to $1,700 an ounce having traded above $1,800 an ounce just a few weeks ago.
A hawkish reminder at Jackson Hole
This reversal in fortunes followed a series of hawkish statements by Federal Reserve officials, culminating in Chair Jerome Powell’s stark message at Jackson Hole that to get inflation back under control, the US central bank will need to raise interest rates higher yet and keep them there for a sustained period.
This brought a reality shock to the mid-August markets that were falsely clinging to healthy US economic data as reasons why the Fed wouldn’t have to keep its aggressive monetary policy up for as long as initially feared.
This picture for gold showcases that its price action is dictated by the actions of the Federal Reserve and any comments by bank officials are unlikely to materially alter in September.
Indeed the monthly cycle which brings key economic data such as jobs figures and the latest inflation readings and builds towards the Fed’s interest decision on September 21st is set to once again produce potentially optimistic data, particularly in the US. However, this time around, investors are likely to be far more cautious in reading too much into any of these after Powell’s hawkish speech.
More interest rate hikes in store
Another sizeable interest rate hike is anticipated by the Fed, with current forecasts pointing to another 75-basis point increase. A few months ago, such a large move was relatively unchartered territory.
Now, markets are used to the prospect of central banks worldwide implementing significant rate hikes as they try to bring runaway inflation, which remains in double-digit territory in numerous countries, back under a semblance of control.
The latter two elements feed into the strength of support that gold benefitted from the price dipping below $1,700 and perhaps point to the metal’s current price equilibrium lying around that level.
The optimism that was building up for silver investors at one point in August with the metal holding above $20 an ounce for a period of time and pointing to the lows of July being the bottom of the market has been well and truly dashed, with silver starting September below $18 an ounce.
The reason for silver now trading at its lowest level in more than two years is the stark messaging by Federal Reserve officials, notably the Chair, Jerome Powell, that dashed any hopes of a soft landing with interest rate rises.
Although recent economic data out of the US has pointed to a country so far not showing any sign of damage from persistently high inflation that may now have peaked, the Fed’s reality check reminded markets that inflation remains way above the bank’s 2% target and so plenty more interest rate rises are in store.
Only time will tell the strength of support
While a recovery back above $18 an ounce is likely, silver’s potential to make significant gains are likely to be capped by the strength of the Fed’s aggressive monetary policy with another 75 basis point rise on the cards in September.
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