In answer to the question posed, I sincerely believe that the recent sharp dips in the gold price have indeed represented excellent buying opportunities. They may well prove the last time in the current gold bull market that the price drops to $1,800 and below.
In my view, the price drops were for all the wrong reasons. The first seemed to be predicated on the ‘hawkish’ opinions of Christopher Waller, a Fed board member who had already made his views known beforehand. A second downward push came with the re-nomination of current Fed chair Jerome Powell for another 4-year term coupled with a rise in the dollar index – which has since fallen back a few points. In my considered view, neither of these should have been grounds for, at one time, knocking the gold price back by around $80. The prior price level of plus $1,860 had even seemed to me to be conservative in the light of then-announced Fed policy which had remained ‘dovish’ despite recognized fears that current inflation rates were higher than the Fed had anticipated and were likely to persist for longer.
Whilst I think the current situation is hugely positive for gold, some commentators are confident that the whole equity sector, which also took a knock, remains in a bull market, and further rises are due here too. They also suggest that this will remain until the Fed starts to tighten significantly and initiate the imposition of an ongoing period of higher interest rates. To this observer, that day may still be some way off – perhaps even further away than recent Fed policy announcements might have suggested.
Let us look in a bit more detail at the news which so adversely affected precious metals and equity prices. Firstly the hawkish statement from Christopher Waller, which precipitated the initial strong dip, should have been totally discounted by the markets.
His views are well known, and while he is a member of the Fed board, his is but one voice calling for tighter measures to be implemented. In this, he has been in the minority to date, and arguably his views are perhaps no more likely to become Fed policy now than they were at the last FOMC meeting, which took place only a month ago.
Now we come to the re-nomination of Jerome Powell. Although he was a Trump appointee and is a Republican, he has been instrumental in guiding the Fed down a relatively ‘dovish’ path until the unemployment rate falls to around 3.5%, which could yet be some time away. So far, there has been a scant indication that he will waver in continuing this current policy. Some Biden advisers, subsequently disappointed, had been promoting the potential appointment of Lael Brainard to lead the Fed. Still, President Biden presumably felt that her advancement might be a step too far, given her almost socialist views. He nominated her for the vice-chair position, secure in the knowledge that although this might suggest she would be next in line for the leading Fed role, this would not come about for four years. The presidency could well change over this length of time, making Brainard’s succession to Fed chair no certainty.
As for likely Fed policy going forwards, we are not necessarily anticipating any significant change in the current direction despite the continuing inflationary pressures and a new slightly less dovish statement from Powell.
The latest Personal Consumption Expenditure (PCE) level puts inflation at 4.1% and this is the measure the Fed tends to utilize despite it usually coming in lower than the more wide-ranging Consumer Price Index (CPI} figure which some think better represents the real inflation level being experienced by the general public.
So far, the Fed has been reluctant to speed up tapering or bringing its interest rate raising plans forward for fear of derailing such economic recovery there may already be. We suspect the current PCE rate is not yet trending high enough for the Fed to change course significantly in its continuing apparent belief that the current higher inflation levels are indeed transitory and will come back down once the coronavirus recovery impact works its way out of the system. Above target inflation for a few months might be welcomed by the Fed to bring the average up to the optimum level given the undershooting of the desired 2% rate for so long.
Of course, discovering the Omicron virus mutation, which is seen as certain to gain a foothold in the USA within the next month or so, could be a game-changer. It is thought to be even more readily transmissible than the Delta variant, although it may be less severe in its effects on individuals. The Biden Administration and the Fed will be under pressure from some quarters to re-implement some preventive measures. Still, they may continue to try to minimize these and let the mutation run its course because they would be unwilling to bring in measures that may serve to restrict economic growth again. As long as the new variant, and likely further virus mutations, don’t seem to overwhelm the health system, this may be considered the more practical course.
Meanwhile, as I have pointed out beforehand, the possible continuation of current Fed policy in the light of a relatively high inflation rate means that gold, as a wealth protector, given real interest rates are effectively negative and will probably stay that way for the time being, should have increased appeal and thus benefit accordingly. Its price, therefore, may well rise over the remainder of the current year and early next.
However, don’t necessarily expect a smooth upwards path. The market tends to be swayed by data and opinion releases like Christopher Waller and the recent less ‘dovish statement from Powell, which had devastating negative effects on the gold price. Other inflation, sentiment, or employment data releases could also have a positive or negative impact given the tendency of the markets’ knee-jerk reactions to such news.
The coronavirus impact on the global economy is certainly far behind us, and US infection rates remain high. The likely continuing discovery and spread of new virus mutations will also affect – perhaps positive for gold in this case. Gold tends to thrive on uncertainty, so it’s probably better to stick with it as the best wealth protector for the time being.
Other asset classes tend to be too volatile and potentially affected by economic growth – or lack of it!
Maybe we’ll find out a more definitive idea of the likely Fed policy path at the December FOMC meeting in a couple of weeks. According to a new statement from Powell, the tapering program will come up for discussion again, which has put renewed pressure on the gold price. This had the effect of knocking the gold price back around $40 after it had made a recovery back up through the $1,800 mark in earlier U.S. trade.