Precious Metals talking points 091721: Watching the Fed like a hawk

By: Rhona O'Connell, Head of Market Analysis

Fri, 17 Sept 2021, 09:24

Precious Metals Commentary; talking point

Rhona O’Connell | Head of Market Analysis, EMEA and Asia regions

Watching the Fed like a hawk: gold under fire

It does look as if there is an increasing case for more hawkishness from the Fed, although that is not an absolute certainty.

But first – the gold market in the past 24 hours and where are we now? Gold’s tumble was already well underway in London hours as the markets looked at the strong manufacturing numbers from the States the previous day, along with the jump to 34.3 in the Bank of New York’s general business conditions index, after 18.3 in the previous month, plus a shift in the tone of the Beige Book, which informs the Fed’s monetary policy, all of which added grist to the hawks’ mill. Strong retail sales yesterday underlined that sentiment so that gold, which peaked at $1,806 intraday on Wednesday, tumbled to a low of $1,747 yesterday in New York as momentum trades and technical triggers exacerbated the move. After such a fall, amounting to $59 or 3.3% in the space of 24 hours, some bargain hunting seemed inevitable, and very probably along with some short covering as some support appeared from the 10-day moving average, which has now been reinforced by crossing the 20-day this morning.

It is possible that there may be institutions taking advantage of this fall in order to pick up some value. Our own study and that of Greenwich Associates for the World Gold Council towards the end of last year both found a general interest in gold, primarily as a mitigator of risk, in the face of low and negative nominal and real interest rates, and the potential for inflationary forces. Not to mention massive liquidity in the system looking for a place to go.

At the physical level, however, the story is different. The Head of our Shanghai Desk told me today that there has been no discernible bargain hunting in China in the face of this fall but that this may well be partly because there are National Holidays coming up next week (mid-Autumn Festival) and the first week of October is the week-long National Holiday. The fact that Shanghai is still at a steady premium to loco London reflects low import levels.

On the other side of the Pacific: yesterday’s retail sales data added more fuel to the hawks’ fire, following the manufacturing figures, a strong PPI at 8.3% year-on-year (although that is still distorted by base effects – an average annual PPI increase from August 2019 is 4.2% pa). The CPI number, at 5.3% (3.3% pa since August 2019), could also favour the hawks as it was pulled down by a 9% drop in airline fares, along with a decline in hotel rates – again, a function of the virus, underlying the uncertainty that it continues to spread.

In the background the Fed’s Beige Book, the latest U.S. numbers are of course at the heart of the big debate that has been dominating the financial markets over the past few months – to what extent are the inflationary forces transitory or persistent? The Beige Book was released last week. This book is key to determining FOMC monetary policy and is most closely scrutinised. This latest Book naturally revolves around inflation, given the increasing bifurcation within the Federal Open Market Committee (FOMC) between hawks and doves, with the next FOMC meeting due next week. Similarly there is a bifurcation in the results analysed by the Book. We suspect that the key here is the final sentence of the Prices Summary, which reads “Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead [our italics]”.

This does not yet mean that the “transitory” element of inflation is giving way to “persistent” inflation, although the latter does revolve to a large extent around inflationary expectations, and therefore the dividing line between the two is not clear-cut and is becoming fuzzier on almost a daily basis. The Book reports that input prices remain widespread with most districts referring to “substantial escalation” in the cost of metals and metals-based products, freight and transportation services and construction materials. The major exception was lumber’s retreat from massively overbought levels.

Half the Districts described the pace of cost increases as “strong”; half as “moderate”. The comments described above could all be argued as transitory; the key variable, of course, remains the delta variant and the level of its disruption. Employment in the transportation and warehousing sector in the United States in August was a solid improvement, which may - may – be an early signal of a gradual resolution of supply chain bottlenecks. If this does work its way through, then the “transitory” proponents should have the upper hand over the more hawkish elements, but it won’t happen in time for the September FOMC.

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