Commodities Week Ahead: Fed-Heavy Week Sets Agenda For Gold; Oil Up On Iran

 | Jun 21, 2021 18:02

With the tapering cat out of the bag, all eyes are on what the Federal Reserve will say hereon, leaving gold’s fate pretty much in the hands of speculators who will try to second guess the central bank at every turn.

While Fed Chairman Jerome Powell tried to calm markets last week, by saying any reduction to its monthly asset buying of $120 billion will be telegraphed well in advance to avoid any inordinate market response, calm is the last thing that should be expected.

Traders thrive on outsized market moves and volatility, and one of the ways of achieving this is to twist and turn every word from Powell and his retinue of central bankers in an attempt to discover the so-called underlying truth, or narrative.

For the record, the Fed has made clear it will not be raising interest rates anytime soon. Its expedited timetable for a hike—or actually two—is toward the end of 2023, which leaves us some 2-½ years, or 30 months, to go. 

The Fed also said it is seeking data on the appropriate time to begin scaling back on the $80 billion in Treasuries and $40 billion in mortgage bonds that the central bank has been buying each month since the COVID-19 outbreak to shield credit markets and the economy from the worst impact of the pandemic. 

“Our intention for this process is that it will be orderly, methodical and transparent,” Powell told a news conference after the Fed’s June policy meeting last week, emphasizing that there will be no haste in both rate hike and tapering.

But it’s the job of traders and money managers to be distrusting of the central bank as the Street believes it would be failing in its fiduciary duty by accepting without pushback the testimony of Powell and those who sit on the Fed’s powerful Federal Open Market Committee. 

Mix Of Hawkish, Dovish Talk Clouds Fed Messaging/h2

Adding to this dynamic is the occasional break in the Fed’s messaging, no thanks to the FOMC’s mix of members who are both hawkish and dovish on monetary policy. While Powell has achieved unbelievable cohesion at the FOMC, by getting most of its members to agree with him that the United States is experiencing “transitory inflation” despite some of the strongest price pressures ever, the few hawkish members are enough to form a wall of doubt around the panel.

The question of whether stronger-than-expected inflation would prompt the Fed to act sooner had already been hanging over financial markets in the run up to last week’s June policy meeting. More uncertainty may be on the way before the July meeting and the Fed’s all-important annual conference in Jackson Hole, Wyoming, in late August, where the discussions on the rate hike and tapering will be front and center.

Gold last week endured its worst week since the 2020 COVID outbreak as prices fell almost 6% on the Fed’s revised timetable for tightening, after more than a year of interest rates at between zero and 0.25%.