Gold Surges on Dovish Fed Comments
Weekly Metals Wrap
The yellow metal exploded higher again this week, breaking to its strongest levels since mid-2013, as comments from Fed Williams sparked expectations of aggressive easing action.
Few expected to see the New York Fed President commenting on monetary policy in an outright way. But, in his speech, Williams shocked markets by outlining the case for immediate action. He said of a rate cut,
“It’s better to deal with the short-term pain of a shot than to take the risk that they’ll contract a disease later on…When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first signs of economic distress.”
Williams Urges Fed To Act Quickly
Williams further explained his support for aggressive action, saying that the Fed should “not keep their powder dry”. He added:
“When the ZLB is nowhere in view, one can afford to move slowly and take a ‘wait and see’ approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB… In that case, you want to do the opposite, and vaccinate against further ills.”
Williams concluded his remarks by saying:
“The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise,”
Market pricing for a rate cut at the July meeting has now jumped significantly.
While the market was already pricing in a .25% rate cut, pricing for a .50% cut has now jumped from around 30% ahead of the comments to 51% after.
The breakout in gold this week has seen price blowing above the multi-year 1433.48 highs. XAUUSD is currently fighting to stay above the level, which has been tested heavily over the last few weeks and consistently found selling pressure. If price holds above here, focus will shift to a test of the 1478.83 level next ahead of the late 2011 lows, 2012 lows of 1521.21, which is a major long term pivot for gold.
Silver prices have been equally boosted by the comments from Fed Williams yesterday, which shunted the dollar lower. Price exploded past both the 15.7342 level and the 16.2055 levels respectively, moving to its highest price since early 2018. Silver is also boosted by the sharp rise in equities prices, particularly the Dow, given its frequent industrial usage.
The move higher in silver this week has seen price blowing through some heavy long term levels as well as the bearish trend line from 2017highs. Price is very close to completing a large, corrective ABCD pattern at the 16.5883 level so until we hold above there, there is risk of retracement from current levels. Above here, the next topside level to watch will be the 17.3142 June 2018 highs.