After weeks of relative stagnation, gold traders were suddenly awoken to a rise in trade volume and price volatility. In a span of one minute, gold futures contracts equalling more than 2 million ounces traded — about 20 minutes before Federal Reserve Chair Janet Yellen was to address a gathering of policy makers in Jackson Hole, Wyoming gold trade.
The occurrence shook the market after a measure of 60-day volatility on the metal touched the lowest since 2005.
Gold had been lying stable amid political disharmony in Washington, worries about rising U.S. interest rates and escalating geopolitical tensions between the U.S. and North Korea.
Investors were not expecting Yellen to make a policy statement anyway, but some market participants were hoping for some signal on the Fed’s planned balance sheet reduction, if not on the outlook for U.S. interest rate hikes.
Yellen’s speech, which lacked clear rate cues, did little to calm the price swings and damped expectations of a rate hike this year.
Federal Reserve Bank of Dallas President Robert Kaplan helped fuel the sharp move before Yellen’s speech Friday by saying the central bank can afford to be patient on raising interest rates even while noting it should shrink the balance sheet soon.
These comments were dovish and pushed gold prices higher. But then when Yellen didn’t mention monetary policy, things started to stabilize again.
The dollar fell to a three-week low against the euro and a one-week trough versus the yen on Friday after Federal Reserve Chair Janet Yellen made no reference to U.S. monetary policy in her speech at the annual central bank research conference in Jackson Hole, Wyoming.
Instead, Yellen focused on U.S. regulations, saying those put in place after the 2007-2009 crises had strengthened the financial system without impeding economic growth, and any future changes should remain modest.
Dollar had weakened because Yellen “didn’t say anything positive for the U.S.”
The dollar has been trading higher for most of the week after sharp losses in recent months.
The dollar fell to a one-week low of 109.23 yen after Yellen’s speech. It was last down 0.2 percent at 109.33.
The euro, meanwhile, hit a three-week high against the dollar and was last up 0.6 percent at $1.1862.
Focus now shifts to the coming week wherein a few interesting events are lined up.
The yellow metal may remain range-bound in the $1,290s ahead of the U.S. Labor Day holiday on September 4th.
Labor Day can mark a variation point in various economic parameters, including the gold price. There are also U.S. Fed and ECB policy meetings that will be held in the second half of September and the U.S. FOMC one in particular will be viewed with particular interest vis-à-vis gold given observers will be looking for clues on the likely date for the next interest rate rise decision and/or Fed balance sheet reductions. The U.S. economy is not showing positive developments as well as forecast by the Fed so there are some who believe any rate increase will now likely be put off until next year.
The period that lies between the Labour Day and The FOMC meeting will be crucial for gold as the markets reactions all depend on this interim period.
Market reaction after Labor Day, and before the FOMC meeting will probably see gold react positively or negatively to economic data (fact or supposition) coming out in the interim, which may hold gold back from bursting through $1,300, which it would likely do if the gold trade FOMC looks like delaying any interest rate rise decision beyond the gold trade calendar year end. An indication that the Fed will indeed continue its tightening programme in December may pull down the gold price, but perhaps not affect its on-going progress in the medium term.
Similarly the ECB policy meeting in Frankfurt, which comes just after the FOMC meeting, will also be followed with strong interest gold trade, but may not see any further tightening while the Euro remains at current levels against the dollar.
We still see gold rising through $1,300 and perhaps hitting $1,350 by the year-end, but sometimes Q4 can prove to be a weak period for precious metals, so we are not wholly confident on this prediction. Currently markets seem difficult to trade!