Gold Stuck at Mid-$1,700, But Ekes Out Gain for 2nd Day in Row

By Barani Krishnan

AiVIF.com - Gold remained buried in mid-$1,700 territory on Monday, although a slight retreat in the dollar helped longs in the yellow metal book an anemic second straight day of gains after a torrid time through most of September.

At the current rate, gold is on track to finish the month down 3.7% — its worst finish since June’s 7% drop. Yet, with all sorts of speculation over the Federal Reserve’s impending stimulus taper, its fortune could change for the better.

U.S. gold futures’ most active contract, December, settled up 30 cents, or 0.02%, at $1,752 per ounce on New York’s Comex.

“Gold is making small gains at the start of the week after once again finding support around $1,740 late last week,” said Craig Erlam, analyst at online trading platform OANDA. “The Fed's insistence that tapering is still the aim this year and a couple more dots suggesting a rate hike late next year could be on the cards dealt a heavy blow to gold prices last week and the outlook remains challenging if policymakers don't change course.”

Fed Chairman Jay Powell was due to update the U.S. Senate on the central bank’s latest policy decisions and how they would help shield and grow the economy from the near two-year-old coronavirus pandemic.

At his news conference after the Fed’s September policy meeting last week, Powell suggested mid-2022 as an appropriate target for concluding the tapering of the central bank’s monthly bond-buying.

The Fed’s so-called dot-plot plan also called for interest rates, suppressed at near-zero since the Covid-19 outbreak, to be raised any time next year onward, he said.

Powell’s Senate testimony on Tuesday could, however, lead to a reexamination of these targets, depending on what he says.

The question of when the Fed ought to taper its stimulus and raise interest rates has been hotly debated in recent months as economic recovery conflicts with a resurgence of the coronavirus’ Delta variant.

The Fed’s stimulus program and other monetary accommodation have been blamed for aggravating price pressures in the United States. The central bank itself has spent an estimated $2.2 trillion in propping up the US economy with its stimulus program since the Covid-19 outbreak.

Besides the central bank’s spending, federal government aid for the pandemic, which began under the Trump administration, has reached at least $4.5 trillion to date. And the Biden administration is asking Congress to approve almost $4 trillion more for its so-called “Build Back Better” plan

After declining 3.5% in 2020 from business shutdowns owing to Covid-19, the U.S. economy expanded robustly this year, expanding 6.5% in the second quarter, in line with the Fed’s forecast.

The Fed’s problem, however, is overwhelming inflation and an underperforming job market.

The Fed’s preferred gauge for inflation - the core Personal Consumption Expenditures Index, which excludes volatile food and energy prices - rose 3.6% in the year through July, its most since 1991. The PCE Index including energy and food rose 4.2% year-on-year.

The Fed’s own target for inflation is 2% per annum.

Charles Evan, president of the Chicago chapter of the Fed, ​​said on Monday the central bank should be more worried about an unsupportive economy not generating consistent inflation in the coming years than current short-term price pressures,

“I’m more uneasy about us not generating enough inflation in 2023 and 2024 than the possibility that we will be living with too much,” said Evans.

One of the more dovish members of the Fed’s policy-making Federal Open Market Committee, Evans typically advocates for a more relaxed monetary regime to allow the economy to grow, sometimes at the expense of inflation.

John Williams, who is New York Fed President, said separately on Monday that he expected inflation, now trending above 2%, to moderate by next year. Williams also said he expected the economy to grow by between 5.5% to 6% this year.