A stronger US dollar index has created a small window of opportunity to buy for gold investors keen to add to their portfolio at the best possible price point. The dollar has climbed back up to its August high in the face of renewed concern that a recession may not only be bearing down on the USA. Earlier this week, Chinese policy makers signalled their fears of an economic downturn, while headlines in the UK and a record low consumer confidence reading suggest that recession is now a very real possibility on both sides of the Atlantic, across the EU and into Asia.
Adding to the strength of the greenback, comments made by Federal Reserve Chairman Jerome Powell earlier this week seemed to indicate a move towards a slightly less hawkish policy over the coming months… or did they?
Minutes released this week from the July monetary policy meeting suggested that the Feds are now concerned that persisting with rate hikes creates a real danger of going too far and tighten further than necessary, creating a deeper recession. There has been a small stock rally on the back of this assumption, with the Nasdaq Composite finally clawing its way back from bear territory.
However, market analysts say this optimistic take may be too premature, meaning the rally could be very fleeting before reality sets in. Trader David Petrosinelli from Inspere X says the rally is misguided, noting “This surely wouldn’t be the first time the general market misinterpreted the minutes…The perception that this was less hawkish, but that’s not what I read when I read the minutes.”
He says that additional rate hikes and further economic pain are inevitable, adding “I just think at the end of the day, the Fed knows that they have an inflation problem. I think they know that they’re not anywhere near restrictive yet in rates, and I think they’re going to get there.”
Citi Bank economists Andrew Hollenhorst and Veronica Clark also agree that a misinterpretation of the notes has taken place and that they don’t indicate that a definitive change in policy is on the horizon.
In a briefing note, they advised “Minutes from the July FOMC were overall balanced, reflecting a committee worried they might provide too little restriction to bring down inflation, but also concerned they might tighten by too much leading to an unnecessarily negative growth outcome.
“Subsequent to the meeting, stronger activity data, concerningly high and persistent wage and price inflation and looser financial conditions suggest Chair Powell will find himself once again making a hawkish push to maintain the ‘resolve’ and ‘credibility’ the minutes indicate the committee intends to reflect through their ‘forceful policy’ actions.”
All this means that the rally in the US dollar to a position of renewed strength, and the window to buy that has caused for gold, is temporary. Analysts appear united in their belief that the Federal Reserve has no option to continue with additional rate hikes, the next of which will take place in just a few weeks’ time.
While a mood of optimism has temporarily masked some of the warning signs of recession, the underlying facts make it clear that further economic contraction appears to be unavoidable. With the underlying factors remaining highly supportive of gold, the smart play is to buy now while the price remains favourable. In response to the greenback rally, the precious metal has dipped to £1,492 (1,772). To illustrate the scale of this window of opportunity, it’s worth noting that gold started the week with prices around the £1,532 ($1,819) mark. Don’t delay and miss your chance to capitalise.
