If they had seen the reaction of prices to Powell's comments last week, it would have been easy for people who bought silver bullion and gold bullion to lose heart.
This would be very shortsighted. Powell may have indicated that the Fed will continue to tighten, but that does not mean they have solved the problem. It is likely that it means that the Fed is reacting too quickly and too late, which will almost certainly open the door for investors in gold and silver.
Central Banks come under scrutiny
On Thursday and Friday of last Week, the Federal Reserve of Kansas City hosted their annual policy symposium for central banksers.
The annual event was in Jackson Hole, Wyoming for the 45th time. In turbulent markets, central bankers' every word can be scrutinized in order to extract relevant information from future policy decisions.
Highlight of the conference, titled Reassessing constraints on the Economy and Policy, was Friday morning's presentation by Fed Chair Jerome Powell.
Powell's brief presentation was focused on the Fed’s ongoing campaign to keep inflation close to its 2% target.
Click the link to watch now
As interest rate expectations rose, both silver and gold prices fell sharply (alongside the US dollar real rate and US dollars). The S&P 500 Index also fell 3.4% Friday, as did US equity markets.
These were the key points from Powell's presentation:
It will be necessary to maintain a strict policy stance in order to restore price stability. Historical records warn against a premature loosening of policy.
We have moved our policy stance to a level that will allow inflation to be returned to 2 percent.
To reduce inflation, it is likely that there will be a sustained period below-trend growth. There will likely be some softening in labor market conditions.
Powell reiterated the July Fed Meeting's statements regarding the September 20-21 meeting and the possibility of additional hikes.
We may need to consider another large increase at our next meeting. The intermeeting period is now almost complete.
We will be relying on all the data received and the changing outlook to make the September meeting a success.
Although the July readings were lower than expected, it is still a small improvement over what the Committee needs to see before they can be confident that inflation is falling.
With inflation at a high of 2 percent and the labor force market tight, this is not the time to stop or pause.
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Powell referred to the lower inflation reading as the Consumer Price Inflation Index, (CPI), and Personal Consumption Expenditure Index(PCE) were slightly lower in July than in June. The CPI was 8.5% compared with 9.1% in June, and the PCE was 6.3% compared with 6.8% in June.
It is still too early to determine if the lower numbers represent a pause in inflation, or a turning point towards inflation declines.
The Fed is still well behind inflation with the Fed funds rate remaining in the 2.25%-2.50% range.
The Fed and other central banks must also consider slowing economic growth and wobbly housing market, lower equity markets and rising debt servicing cost for both households as well as governments.
In Europe, especially, rising natural gas prices and limited storage supply have already strained household budgets.
Fed Fund Rate and Inflation Indiators
Fed Fund Rate and Inflation Indiators
Central Banks are losing their sense of reality
The damage has been done by central banks that have printed so much money and kept interest rate low for so many years. It will take some time to unwind the damage. Powell said that there would be pain when governments and households get over the long-term low interest rates.
The problem is that central banks are losing their ability to see the real world. Central banks may now push rates too high, leading to a deeper recession.
According to CME Group's FedWatch tool, the likelihood of another 75-basis points hike by Fed at September meeting has increased to nearly 70 percent.
The likelihood that the fed funds rates will finish the year in the 3.75%-4.00% range is as high as 60%. This is 1.5% more than the current rate. The markets currently place the greatest probability that the fed funds rate will remain in this range or be lower by July 2023.
These probabilities can change rapidly as new data is released. A Friday employment report is scheduled before the September meeting. CPI data for August, to name just a few of the data releases, are also available.
Bottom line, investors in gold and silver need patience. The day of reckoning is coming, and prices will move out of the sideways channel.
We return to the Jackson Hole Symposium and leave you with Edward Kane's last quote from the 1983 symposium. This quote is very pertinent to the current monetary policy climate :
“Depending on the economic indices that are being emphasized and how one considers other developments, the October 1979 FOMC policy change can be described as either extremely successful or very unimportant.
Kane said that it was the third option. This was after two back-to-back recessions that lasted 16 months. Kane described the policies as ” catastrophic in its effects“. This includes lower economic growth, higher unemployment, bankruptcy and foreclosure rates.
This little glimpse into the discussions that take place in the GoldCore office is worth a subscribe to our YouTube Channel. You will find many interviews and discussions with the top commentators, experts and financial market professionals. Here is our latest interview with Marc Faber and Jim Rickards.
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The Trading Desk
Over the past five months, gold has closed lower than it did in the previous six months. The last time it had such a performance was in 2018, when it closed down for 6 consecutive month.
When gold finally reached its 2018 low, it moved higher over the next 18-months and hit a new high in August 2020.
We are at a similar point right now.
Standard Charter Bank recently stated that the downside risks are limited because a lot of this risk is already priced in to the gold price.
Recent USD highs have reached 20-year records. The September interest rate hike is currently scheduled at 75bp.
A Fed that is more cautious could see a rate increase of 50bp, with a pause for November and December. The Fed is data dependent so it may want to assess the impact of the hike.
Keep an eye on the 2nd September for US Job Numbers.
Over the past few months, GoldCore has continued to monitor the market's average cost per client.
Clients selling down at a rate of 80% have never been seen.
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Gold Coins for Sale
GOLD PRICES (USD. GBP. & EUR – AM/ PM LBMA Fix).
31-08-2022 1712.40 1715.90 1472.15 1478.08 1713.60 1715.21
30-08-2022 1734.00 1730.30 1475.81 1481.31 1726.37 1727.36
26-08-2022 1752.10 1751.25 1480.52 1475.95 1751.05 1741.09
25-08-2022 1762.40 1753.55 1489.23 1485.26 1763.81 1760.04
24-08-2022 1752.00 1745.65 1483.59 1483.10 1760.41 1759.79
23-08-2022 1739.45 1746.55 1479.05 1473.04 1752.84 1744.80
22-08-2022 1732.80 1733.25 1467.34 1471.01 1731.24 1737.93
19-08-2022 1752.90 1750.75 1476.12 1480.96 1738.53 1742.00
18-08-2022 1765.60 1765.55 1466.15 1470.53 1737.53 1744.36
17-08-2022 1773.65 1767.20 1465.92 1463.77 1742.97 1737.16
16-08-2022 1776.15 1774.85 1476.16 1469.22 1752.70 1745.92
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The post Markets forget that Central Banks can't fix the world using interest rates appeared first at GoldCore News.
By: Stephen Flood
Title: When markets forget that Central Banks cannot fix the world with interest rates
Sourced From: news.goldcore.com/when-markets-forget-that-central-banks-cannot-fix-the-world-with-interest-rates/
Published Date: Thu, 01 Sep 2022 12:41:16 +0000