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Gold: Is Another Crash Coming After Jackson Hole?

Published 08/27/2021, 03:27 AM
Updated 09/02/2020, 02:05 AM

I posed this question a couple of weeks back and am asking it again as the Big Day is here: Has the drop in gold been proportionate to the speculation over Jackson Hole and could it fall further?

No one, except possibly Jerome Powell himself, knows what the Federal Reserve Chairman will announce today with regards to the central bank’s plan over its monthly stimulus spending of $120 billion.Gold Daily

While many might agree that those asset purchases practically saved the nation from financial collapse in the early days of the pandemic, a growing number are saying now the Fed is virtually strangling the same economy it once saved, via inflation.

The Fed’s stimulus program is being blamed for fueling inflation in the United States, where economic growth for the second quarter of 2021 was estimated at 6.6% on Thursday—way above the 3.5% decline noted for all of 2020. The Fed itself has projected economic growth at 6.5% for all of 2021.

Aside from the central bank’s asset purchases, the Biden administration has managed to pass more than $1 trillion in COVID-related spending since the president took office in January. Democrat lawmakers aligned to Biden this week advanced a further spending plan for $3.5 trillion to advance his economic agenda.

The Fed has an annual inflation target of 2%. But the US Consumer Price Index, a broadly-watched inflation gauge, grew by 5.4% over a one-year period in June.

More importantly, the Fed’s preferred inflation gauge, the core Personal Consumption Expenditure Index, expanded by 3.5% in the year to June—its most in 30 years.

At least three senior Fed officials—Dallas’ Robert Kaplan, St. Louis’ James Bullard and Kansas City’s Esther George—spoke forcefully on Thursday on the need for a taper of the stimulus, adding pressure on Powell hours before he takes the rostrum at the annual Jackson Hole summit.

The event, which normally takes place in Jackson Hole, Wyoming, but is being held virtually for the second straight year due to the coronavirus pandemic, has been often used by Fed policymakers in the past to provide guidance on their future policy. It will be live-streamed as a Kansas City Fed's central banking conference.

At The Least, A Groundwork For Fed Taper Is Expected

Regional Fed chiefs Kaplan, Bullard and George, in their comments Thursday, downplayed the impact of COVID's Delta variant, which many economists and investors think will prevent Powell from drastically pulling the handbrake on the stimulus. 

Thus, many believe Powell will strike a more dovish tone in his 10:00 AM ET (1400 GMT) speech, according to a Reuters preview that quoted Fiera Capital portfolio manager Candice Bangsund as saying:

"While Chair Powell is likely to ... lay the groundwork for an eventual taper, we expect him to err on the side of caution and patience this week given that the macroeconomic landscape has deteriorated since the July policy gathering."

Rough consensus in the market is that Powell will likely announce tapering in the fourth quarter, giving a clear signal at one meeting before the actual announcement.

Kyosuke Suzuki, president of financial algotech company Ryobi Systems, added in the same preview:

"For Powell, there is no merit in specifying the exact timing for tapering at today's speech. If he doesn't drop a clear hint, that will be mildly positive for stocks."

On the forex front, the Dollar Index and risk-sensitive currencies are expected to surge in the event of a taper, while the yen is likely to weaken in that case, he added.

The big question, at least for those who clicked on this story is, where does that leave gold?

Gold Lacks Will To Push Hard Above $1,800

As precious metals strategist David Song noted in a blog posted on the Daily FX site on Thursday, gold has pushed above the 50-Day SMA, or Simple Moving Average, of $1790, “but lack(s) momentum to hold above the moving average”.

Such an outcome might undermine gold’s recent recovery as the indicator develops a negative slope, Song wrote, adding:

“The recent recovery in the price of gold appears to have stalled ahead of the monthly high ($1832) as it struggles to retain the advance from the start of the week.”

“As a result, a shift in the Fed’s forward guidance may undermine the recovery in bullion, and lack of momentum to hold above the 50-Day SMA ($1790) would cause a bearish outlook for the price of gold as a ‘death cross’ takes shape in August.”

With that said, the rebound from the monthly low ($1682) may turn out to be a correction in the broader trend rather than a change in market behavior as the 50-Day ($1790) and 200-Day ($1810) SMAs develop a negative slope, Song said.

Separately, Rekha Chauhan, another gold blogger, wrote on the FX Street that from a technical perspective, gold was challenging the 21-DMA, or Daily Moving Average, of $1785 once again.

Said Chauhan:

“A daily closing below the latter could confirm a bearish reversal following a rejection at the 200-DMA at $1810 earlier this week.”

“The next stop for the bears is seen at the one-week lows, below which the Aug. 16 low of $1771 could come into play. Alternatively, recapturing 50-DMA at $1791 on a sustained basis is critical to attempting a meaningful recovery towards the $1800 level.”

Credit Suisse, in a note issued Thursday, said gold has seen a strong bounce off its March lows at $1679.80/$1677.83, to reach the 200-DMA of $1810.

It added:

"We suspect that this will repel the advance at least on the initial test and provoke some further consolidation.”

“We would allow for a pullback towards $1750, the June 29 low and allow for an attempt at stabilization there. Near-term risks are on the downside but longer-term to fairly neutral/side lined.”

Credit Suisse also projected key resistance at the mid-July high of $1834, saying a move above that was needed to retest the $1856/57 June 4 low and the $1874 2020-2021 downtrend.

“Support at $1679/77 is reinforced by the $1670 June 2020 low. Below $1670 would target the 2018-2021 uptrend at $1587,” the Swiss banking group added.

Will Gold See Another Mid-$1,600 Foray?

So, how much more can gold fall from here?

Back to near mid-$1,600 levels is likely, says Song, explaining:

“(A) lack of momentum to hold above the 50-Day ($1790) may push the price of gold back below the $1786 (38.2% expansion) region to bring the Fibonacci overlap around $1743 (23.6% expansion) to $1763 (50% retracement) on the radar.”

“Next area of interest comes in around $1690 (61.8% retracement) to $1695 (61.8% expansion), with a break of the monthly low ($1682) opening up the $1670 (50% expansion) region.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Latest comments

Ive been listening to gurus for years saying buy gold, add gold and hold- meanwhile I lost my shirt trading it - no more- i just buy gdxu on every dip and its starting to payoff
Buy gold and hold.  Now it's only a question of when..
A farce, money supply can double without appreciation is metals. Hmmmmm
The author provides a chart of Gold but does not comment on the two suddent dumps in price (price vs. volume chart would be useful).  These two events happened on Sunday nights when the trading was the lowest and the last "dump" was executed within 15 mins w/ dump of 24k Gold contracts (ea 100-400 oz  Au). There is a reson for that - and a "true" analysis would at least comment on that.  The analysts quoted talk about "weaknesses" vs "strengths" w/o addressing root caused of the Gold price behavior.  We have 5.4% official CPI, and > 10% (unofficial) inflation rate right now.  Gold is one of the primary mechanisms of protection against high inflation.  The analysts are pros, but as U. Sinclair said: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
Hello Peter, if you're referring to the "Flash Crash" of Aug 9. there's a link to that in the first sentence itself, under "question". True, I didn't drill into the nitty-gritty of that epic collapse, as my premise was more of what's hereon rather than what was. I have explored the ridiculous subduing of gold prices by so-called bullion banks JPMorgan and Nova Scotia -- as well as China's central bank -- in many past articles, if you care to trawl back and read. This one was a pure technical outlook ahead of Jackson Hole. And, finally, that observation by U. Sinclair doesn't apply as Investing.com doesn't tell me what to do or write. Regards.
It won’t last longer. Gold & Silver may just shutdown for a while and wait. They have cash to do so… but what about those who need the metal?Besides, inflation is persistent and more than double of Fed “average expectation” YoY… just do the math (7 months already passed this year).
Gold and Silver producers*
Will this speech affect the Australian dollar as well?Or other currency pairs
They, while moving the price of gold just $100 dollars, have absolutely hammered gold mining stocks. They deserve a break after 2 months of taper talks and no action.
If one could print trillions of gold coins do you think they would maintain their value? Everyone knows that the gold price is rigged. It's no more complicated than that. Period!!
People will keep selling gold to 640 hoping to cash in on the stocks ride. then stocks go down too.
Feds action to suppress gold can only push money into cryptos. In the end something has to be a reliable indicator for inflation. Now looks like housing price and crypto price are the ones.
Price tags in the shops, restaurant menus and utility bills are the best indicators for me right now.
The fed front runs everything. They have all of their puts and calls all bought . Meanwhile, the bombs will be going off all weekend in Kabul. Biden and his liberal friends will start a war. Proxy war , just like Obama and Hillary did in Syria and Libia
I am highly disappointed with gold, specially because I hold a considerable amount physical gold. I guess if my gold was not physical I would have already sold most of it 10 months ago. Still, I believe gold at the current level is undervalue and the fair price should be between 2k and 2.3k People say that they buy gold because it is an insurance; but the fact is, nobody bought it because gold is an insurance, we bought it because we expected the price of gold to go higher. Based on the Cycle of the DOW to Gold ratio, the next peak in gold price in comparison to stocks should be only in 2027.... 6 years from now
Well written… thank you :-)
These panic creating articles always appear at each FED meeting !! The true baseline is the fact that new trillions of debt won't go away soon....Money spending and money printing won't go away . So Dow Jones and S&P500 and Nasdaq will be steady but gold price will also be steady ! Don't forget the US is not the only parameter that is important for the gold price ! The usd and the US economy and US debt  are important for the gold price setting...of course but it's not the only thing that counts. China and European and India demand for gold stays steady and gold will stay a very nice diversification in each portfolio . If you can buy a physical ETF or bullion gold beltween 1775-1825 usd you have done an excellent deal !!
best app to buy bitcoin in India ????
1.100$ - 1.200$
Very good
What the market seems to not understand is that even if the Fed does taper, it's not going to be able to finish it without causing the market to crash and the US economy taking a massive hit. The Fed will not be able to normalize monetary policy with the current level of corporate and government debt (don't forget all the future stimulus bills that'll need to be funded). Maybe the market actually needs to see the consequences of the fed being boxed in before gold really takes off, but for now any indicators to tighten policy (high CPI readings etc) or a general mentioning of "tightening" policy seems to result in a gold sell off.
work from Benin city
how I mine going to do the buy and sell you people should put me through here please
crashes and bubbles have their own natural timing. not necessarily on any short-term fundamentals
Buy gold and hold.  Now it's only a question of when
1460 is the next stop
that is what you think. I know more about gold than all Chinese put together. I rarely am wrong 🤣
you should head over to the copper futures comments if you wanna see people being wrong 😂
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