Gold: Powell’s Remarks Just Dovish Enough to Chase Out Weak Shorts

Gold futures are edging higher early Thursday as short-sellers continue to cover positions after U.S. Federal Reserve Chair Jerome Powell softened his tone about a series of aggressive rate hikes for the year.

Powell’s comments didn’t change the trend to up, but what they did was encourage bearish traders, perhaps looking for rate hikes as high as 75-basis points, to aggressively cover positions.

Generally speaking, as long as the Fed is raising rates, gold is going to have a hard time changing its trend to up. This could happen, however, in a couple of months if inflation continues to surge or if the Fed’s rate hikes trash the country’s economic recovery, forcing the Fed to become less-aggressive.

At 05:43 GMT, June Comex gold futures are trading $1901.90, up $33.10 or +1.77%. On Wednesday, the SPDR Gold Shares ETF (GLD) settled at $175.81, up $1.72 or +0.99%.

What Did the Fed Do and What Did Powell Say to Shake Up the Gold Market?

The Federal Reserve increased its benchmark interest rate by half a percentage point, in line with market expectations. In addition, the central bank outlined a program in which it eventually will reduce its bond holdings by $95 billion a month. The rate hike was the largest since 2000 and was designed as an aggressive response to burgeoning inflation pressures.

Gold prices firmed after the Fed raised rates and released its monetary policy statement because those moves were telegraphed for weeks.

What triggered the short-covering rally were Fed Chairman Jerome Powell’s comments that underlined his commitment to bring inflation down while indicating that raising rates by 75 basis points at a time “is not something the committee is actively considering.

Market Mechanics: Lower Yields, Lower Dollar Lead to Higher Gold Prices

High yields and a stronger U.S. Dollar have been driving gold prices sharply lower for weeks. So it nearly goes without saying that a drop in yields and the dollar would push prices higher. This is what happened Wednesday afternoon.

The 10-year Treasury yield turned lower Wednesday after Powell indicated the central bank won’t get even more aggressive in raising rates. After essentially getting ahead of the Fed, Treasury bond sellers and U.S. Dollar buyers had to make adjustments to their positions to price in the new information.

Consequently, gold traders covered some of their short positions since lower bond yields make zero-yield bullion more attractive by lowering its opportunity cost. Furthermore, falling rates made the U.S. Dollar a less-attractive investment and made dollar-denominated gold more attractive to foreign buyers.

Short-Term Outlook

We could see a near-term short-covering rally in gold because of the fresh news, but I don’t expect to see a major change in the trend because the U.S. economy is still strong and the Fed is going to continue to raise rates at future meetings until inflation gets under control.

Powell said, the American economy is very strong and well-positioned to handle tighter monetary policy. Adding that he foresees a “soft or softish” landing for the economy despite tighter monetary policy.

Given this assessment, gold prices are likely to be capped unless the economy weakens so much the Fed has to pull back the reins on further rate hikes. But it may takes months before we even know that.

In the meantime, traders are going to have to monitor data on housing, job growth, and wage increases to ascertain whether the Fed has to get more- or less-aggressive with its rate hikes.