Powell’s speech at Jackson Hole could set gold price on course for $2,000 or $1,700

Gold faces a testing time but has the potential to recover from the recent sell-off if the chairman of the US central bank Jerome Powell tells a meeting of bankers in the US on Friday that the cycle of rising interest rates is coming to an end.

The annual Jackson Hole Economic Symposium in a remote ski resort on the Wyoming/Idaho border is a popular event for major US policy announcements and this year’s gathering promises to be the most important in decades.

Early hints point to Powell using his keynote speech to say rates will keep rising until inflation is tamed, which could mean another round of increases and another fall in the gold price, which is being driven down by attractive real yields on US Government bonds.

But if he maps out a policy for peak rates this year followed by a decline next year demand for gold could jump as investors move back into the ultimate safe haven asset with the gold price re-testing the US$2000 an ounce mark it reached as recently as mid-May.

Australian investors will not get to hear Powell’s rate verdict until Saturday morning which means any trading in gold, or the shares of gold explorers and producers, will be riskier than usual this week.

Morgan Stanley’s advice: “No sleep till Jackson Hole”

“No sleep till Jackon Hole” is the advice for investors with an appetite for gold from leading US investment bank Morgan Stanley.

“We would wait on the sideline ahead of the Jackson Hole Economic Symposium which will discuss structural change in the US economy,” the bank said in a research note headed “Gold: higher yields hurt”.

The Morgan Stanley report featured two possible future prices for gold, US$1700/oz if bond yields keep rising, or US$2075/oz, a year-end target set by the bank several weeks ago.

On the gold market the price has been showing signs of a recovery after dropping from US$1970/oz at the end of last month to US$1885/oz late last week before edging back to US$1900/oz.

What’s suppressing gold is the lure for investors of high yields on bonds and bank deposits which, in the case of the important 10-year US Treasury note has risen to 4.33%, the highest in 16 years.

Echoes from 2007?

The last time the 10-year bond was above its current level was in October 2007, a date which should ring alarm bells for investors because that was the starting point of the global financial crisis which saw a steep fall in the value of most assets – and a sharp rise in the price of gold.

No one knows if history is about to repeat, but the risk cannot be ignored because if Powell presses too hard on interest rates something might break.

It’s the potential for an interest rate mistake on the part of the US central bank which makes this week’s Jackson Hole symposium so important.

Mohamed El-Erian’s view

Mohamed El-Erian, a London-based economist and president of Queen’s College at Cambridge University as well as an adviser to Germany’s Allianz insurance group, believes there will not be a major change in policy announced at the Jackson Hole meeting.

Writing in London’s Financial Times newspaper this week El-Arian said Powell could follow one of three possible approaches which were either an imminent policy shift, a discussion about long-term monetary policy or limiting himself to narrow issues with “no immediate policy implications.”

“If I were advising him, I would suggest the third strategy at this economic, political and institutional juncture,” El-Arian wrote.

Decoded, the high-flying El-Arian is recommending that Powell stick to his current policy of trying to drive inflation back to an annual target of 2%.

If El-Arian is right then the Morgan Stanley warning of a fall in the gold price moves into sight.

“As a non-yielding asset, gold has to compete for a place in portfolios which is less of an issue when bond yields are low but more challenging when yields rise,” Morgan Stanley said.

“While higher yields have weighed on the gold price, the metal actually remains very well supported versus history.

“Using the 2022 (interest rate) trend line, current yields imply a gold price of US$1700/oz versus the current US$1900/oz, while the 2018-2021 trend line would have given an even lower price.”

Diverging views and market uncertainty

It’s those diverging views which makes this week’s Jackson Hole symposium the biggest economic event since markets were derailed by Russia’s war in Ukraine and the Covid crisis which have both helped feed inflation.

A guide to what comes next might be detectible in the latest interest rate trends published in a research note earlier this week by Wilsons, a local investment bank.

Without providing specific dates the Wilsons graph of US interest rates shows them close to a peak with a downturn expected by the end of the year, accelerating into the new year.

“We expect the US yield ascent will retrace over the coming months as evidence of easing inflation and cooling growth accumulates,” Wilsons said.

Australia’s monetary policy in context

In Australia, the disinflation downtrend playing out in the US does not appear to be as clear.

However, Australia’s central bank and the market now appear to be coming around to a view that “the bank has done enough”.

If Wilsons and Morgan Stanley are right the end of the interest rate rising cycle might not be far away, which is a strong buy signal for gold.

But, if Powell sticks to his implied threat to “keep raising rates until consumers stop spending” then gold might have to wait for the new year to head back to US$2000/oz.