Gold prices fall from 6-year highs

Gold prices are well off their highs, dipping into negative territory after Federal Reserve chairman Jerome Powell failed to shed any new light on the pace of interest rate cuts later in the year.

Speaking at an event in New York, Powell struck a relatively neutral tone on the US economy and monetary policy; he reiterated his outlook for slow but positive growth this year, despite rising crosscurrents in the global economy.

“Against the backdrop of heightened uncertainties, the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favourable, with unemployment remaining near historic lows. Inflation is expected to return to 2 percent over time, but at a somewhat slower pace than we foresaw earlier in the year,” he said. However, the risks to this favourable baseline outlook appear to have grown.”

Gold prices, while holding on to most of its recent gains are well off their highs following Powell’s comments. August gold futures last traded at $1 417 an ounce, relatively unchanged on the day.

Powell noted that many of his central bank colleagues are grappling with the risks to the US economy and if they warrant additional policy accommodation. He added that economic uncertainty has only picked up in the last few months. He said that consumer demand is still fairly strong. It is also important to not overreact in the short term, he said.

“Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. But we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment,” he said.

“Doing so would risk adding even more uncertainty to the outlook. We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

Last week, following its monetary policy meeting, the US central bank removed the word “patient” from its monetary policy statement, which many economists and markets took as a sign that the committee is ready to raise interest rates.

Gold prices have rallied significantly since the Fed meeting, ultimately hitting a six-year high above $1 400 an ounce on growing expectations of a rate hike as soon as July. CME FedWatch Tool is currently pricing in a 50 basis-point cut next month.
Avery Shenfeld, senior economist at CIBC Capital Markets, said that the comments, while dovish, are trying to downplay the current chatter of expected aggressive action from the Fed.

“Powell’s caution about overreacting might put a touch of upward pressure on short term yields today,” he said.
“We interpret his warning that “monetary policy should not overreact to any individual data point or short term swing in sentiment” as a shot across the bow for those advocating a 50 bp move in July. The other remarks did lean, however, towards moving sooner rather than later.”

While Powell appears to be managing aggressive monetary policy expectations he continues to leave the door open for rate cuts. During the question and answer period he noted that the current inflation trend is an argument for easing.

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