In September, spot gold prices fell sharply by nearly 5%, as the market increasingly expected the Fed to reduce asset purchases from November and may raise interest rates at the end of 2022, and the U.S. dollar index set a new one-year high. However, Washington’s stalemate over the US debt ceiling may cause the government to shut down, adding uncertainty to the trend of gold prices.
At 19:26 on September 30, Beijing time, spot gold fell by 4.9% to US$1724.86 per ounce; the US dollar index rose by 1.26% to 94.453. The price of gold this month hit a new low of US$1721.76 per ounce since August 10, and the US dollar index rose to a new high of 94.504 since September 28, 2020.
The Federal Reserve: the fastest to start in November to withdraw
The Fed this month maintained the target interest rate range at the current 0%-0.25% unchanged, indicating that it may start to reduce the pace of monthly bond purchases as early as November. This gives the US dollar a huge new upward mobility and brings selling pressure to the gold market.
Powell stated at the press conference that as long as U.S. employment growth is “reasonably strong” by September, “there is no need for an astonishing or super strong employment report”, the Fed can begin to reduce the number of jobs after the November 2-3 policy meeting. The monthly debt purchase scale of 120 billion US dollars, the United States will release the September employment report in early October, which is the last employment report before the November meeting.
Fed Governor Brainard (with permanent voting rights) stated on September 27: “As far as I think further substantive progress is concerned, employment is still somewhat insufficient. But if progress continues as I hope, it may be reached soon. standard.”
New York Fed President Williams (with permanent voting rights) stated on September 27: “I think it’s clear that we have made further substantial progress in achieving our inflation target. We have also made extraordinary progress in achieving maximum employment. Good progress. Assuming that the economy continues to improve as I expected, there may soon be reason to slow down the pace of asset purchases.”
Chicago Fed President Evans (with voting rights in 2021) stated on September 27: “I think the economy is close to reaching the standard of’further substantive progress’ we set in December last year. This is the beginning of reducing the threshold for asset purchases. If the employment improvement trend continues, it seems likely that these conditions will be met soon, and reductions can begin.”
The non-agricultural employment population in the United States increased by 235,000 in August, the smallest increase since January 2021. It is far less than the expected increase of 725 million. The previous value was revised up to an increase of 1.053 million. It reflects people’s growing concern about the rapid spread of the new crown variant virus Delta, and the difficulty of filling vacant positions. The current jobs in the United States are still more than 5 million fewer than before the epidemic.
Conrad DeQuadros, senior economic adviser to Brean Capital in New York, said: “The new crown epidemic may make this comparison less useful, but in the past 12 years, there have been 11 years including 2020. After the publication of the two employment reports, they were revised up.”
Mahir Rasheed, an economist at the Oxford Economics Institute, said: “We are not describing the current environment as a labor shortage, but as a temporary dislocation between labor supply and demand, which will improve in the coming months.”
Colin Cieszynski, chief market strategist at SIA Wealth Management, said he is short on gold because the Fed hopes to change its monetary policy before the end of the year. “I think as the Fed gradually reduces its bond purchases, the U.S. dollar may continue to gain support, putting pressure on gold prices.”
Interest rate hike may be earlier than expected
The Fed’s updated economic forecasts and interest rate dot plots this month suggest that half of the Fed’s policymakers now expect to raise interest rates next year and believe that interest rates should rise to at least 1% by the end of 2023, reflecting the need to gradually tighten policies to control inflation. Views have gained increasing consensus.
The Fed’s median estimate of US gross domestic product (GDP) by policymakers is that it will grow by 5.9% this year and 3.8% in 2022, while the forecast in June this year is 7.0% growth in 2021 and 3.3% next year. The unemployment rate is expected to fall to 4.8% this year and to 3.8% in 2022. It is expected that this year’s price increase will reach 4.2%, higher than expected in June.
Although the increase in CPI in the United States slowed down in August, under the influence of raw material shortages, logistics bottlenecks and recruitment difficulties, companies are facing increasing cost pressures, which continue to push up prices of consumer goods and services. The fragile supply chain interruption problem may continue until 2022, and the upward pressure on inflation is expected to be more lasting than expected.
Although the American Institute of Supply Management (ISM) survey this month showed that the input price index of manufacturing and service industries fell sharply in August, factories and service providers still have difficulty in obtaining labor and raw materials, and are facing logistics delays. Supply bottlenecks are making it more difficult for companies to replenish inventories. Previously, corporate inventories fell in the first half of this year.
The Fed’s policy framework announced last year seeks to tolerate inflation levels of more than 2% for a longer period of time to offset the fact that it has not been able to meet the target in the past decade. It seems that the upward pace of inflation will not deviate from the normal track, but the surge in inflation this year has surprised officials. It now seems that the duration may be longer than initially expected.
St. Louis Federal Reserve Chairman Brad said that the Fed should begin to reduce its balance sheet of about 8 trillion US dollars as soon as it ends its bond purchase plan next year, reminding the Fed that it may need more aggressive measures to deal with high inflation, including two interest rate hikes next year.
If the Fed starts to reduce its holdings of long-term bonds, it will theoretically cause long-term interest rates to rise. The Fed’s increase of short-term policy interest rates will resonate with it, further reducing the central bank’s stimulus to the overall economy. There is still 2%-3% upside room for the US dollar index. Therefore, gold will be further treated coldly by investors.
Powell’s conflict
Fed Chairman Powell stated on September 29 that resolving the “tension” between high inflation and high unemployment is the most pressing issue facing the Fed, admitting that these two goals may conflict, “This is a very long time.” We have never faced a situation before. The relationship between our two goals is tense… Inflation is high and far above the target, but the labor market seems to be idle. “He was referring to the “stagflation” period in the 1970s in the United States. ——High unemployment rate and rapid price increase coexist.
Powell said at the European Central Bank’s central bank forum: “Seeing that bottlenecks and supply chain issues have not improved… This is frustrating, in fact, it has clearly deteriorated. We think this situation may continue into next year and cause inflation. It lasted longer than we expected.”
Powell added, “Even if it may prove to be temporary in the end, if this period of high inflation lasts long enough, will it begin to have an impact and change people’s perception of inflation? We are watching this very closely.”
When asked about his biggest concern, Powell said that the two goals of the Fed’s price stability and full employment may be in conflict. This situation may force the Fed to raise interest rates while still wanting to encourage employment growth. Make a trade-off between restraining price increases.
The normally negative correlation between unemployment and inflation seems to have weakened in recent years, because in the United States, low inflation coexists with a very tight labor market and low unemployment. However, the global supply shock caused by the epidemic has led to an imbalance between the supply and demand of goods and services, at least temporarily restoring this dynamic relationship in the past.
The question now is how long this chaos will last, and whether future developments will prove that inflation is not temporary, it is climbing faster than the pace of improvement in the job market, and ultimately forcing the Fed to start raising interest rates while the unemployment rate is still high.
Kit Juckes, a macro strategist at Societe Generale, wrote in his latest research report, “The Federal Reserve has fired the starting gun to normalize monetary policy. As the United States moves away from the zero interest rate range, leaving the euro zone and Japan behind, Global excess savings will inevitably be attracted to the U.S. dollar. The U.S. dollar may outperform most other currencies in the coming year, and this trend may begin earlier than we expected.”
The possibility of U.S. eventual default is unlikely
As the US Congress is about to face two deadlines for financing the government and resolving the US$28.4 trillion debt ceiling issue, there are also signs of tension in the US market. September 30 is the deadline to avoid the government shutdown.
The Republicans in the U.S. Senate blocked the efforts of U.S. President Biden’s Democratic colleagues on September 28 to prevent a potentially serious U.S. credit default. The federal government funding will expire on September 30, and the loan authorization is set to be October 18 Exhausted. Finance Minister Yelondon urged Congress to take action before October 18 to avoid “serious harm” to the economy.
The House of Representatives voted on September 29 to pass a bill that put the debt ceiling on hold until December 2022. The bill has now been submitted to the Senate and is expected to be blocked by Republicans again. If the U.S. Congress does not take action on the debt ceiling, the possibility of a fiscal crisis, although small, is rising, but few people think that the U.S. will eventually default.
New York Fed President Williams warned on Monday that if the United States fails to resolve the debt ceiling issue, it may trigger a negative reaction in the market, but he also said that current market participants seem to believe that the debt ceiling issue will be resolved.
The failure of Congress to act in time to prevent the government from shutting down or defaulting on debt is becoming more and more likely. Concerns about the debt ceiling have helped boost the U.S. dollar. Actions under gold can accelerate again, and the overall outlook for gold prices is pessimistic. However, if the two parties in the United States cannot reach an agreement on the federal debt ceiling as soon as possible, and eventually lead to a default by the government, gold may rebound sharply in the short-term at any time.