Gold Prices Erase Two-Week Rise In A Day On Fed Outlook Rethink

Gold prices capitulated as US financial markets came back to life after Monday’s Labor Day holiday. The metal shed 1.6 percent on Tuesday, marking the largest one-day drop in a month and erasing all of the gains scored in the wake of the Fed’s Jackson Hole symposium and Augusts’ US employment data.

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These catalysts fueled speculation that the Fed may delay the wind-back of QE asset purchases, the first phase in withdrawing expansive stimulus unleashed amid the Covid-19 outbreak. Chair Powell sought to disconnect tapering QE from interest rate hikes at Jackson Hole, and payrolls growth disappointed.

A rethink now seems to have occurred. As argued earlier, Mr Powell’s speech at Jackson Hole amounted to the most hawkish language from the US central bank since the start of the pandemic. That this was read as ‘dovish’ speaks to the success of the Fed’s effort at acclimating markets to the inevitability of tightening ahead.

As for the jobs report, a slightly nuanced read reveals that weak hiring came alongside surging wage inflation and a lower unemployment rate. This implies that the problem is not in the demand for workers, but in their supply. JOLTs data published this week putting job vacancies at a record high underscores this.

Worries about a wage-push inflationary spiral seem sensible in such a scenario, belated though they might be. This would see companies pass on higher labor costs to consumers, who then demand still-higher wages to cope. If such a cycle were triggered, recent price growth may be far less “transitory” than the Fed has asserted.

Will The ECB Help Underpin Gold Prices?

The spotlight now turns to the ECB. The markets seem to think that a slowing of asset-buying through the pandemic-triggered PEPP program may be in the cards at today’s policy announcement. That may clash with the central bank’s latest policy review however.

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