Gold price uncertain as Powell stays hawkish in Jackson Hole

Gold (XAU/USD) has opened the week trading above the $1,900/oz mark, enjoying a modest reprieve after shedding close to $100 of its value throughout August 2023 on the back of hawkish actions and rhetoric by the U.S. Federal Reserve (Fed).

The price of the commodity dropped last Friday after the head of the Federal Reserve, Jerome Powell, hinted at further potential interest rate hikes in a speech at the Jackson Hole symposium in Wyoming.

"We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective," Powell said. However, he clarified that the Fed would “proceed carefully” with additional hikes as he noted both progress made on easing price pressures as well as risks from the surprising strength of the US economy.

Despite the announcement, the gold price managed to hold steady and even book growth of over 1% over the past week, indicating a cautious mood among investors.

Pressure on gold as Fed unlikely to back down from rate hikes

In the twelve months leading up to July, inflation in the U.S. has moved down to 3.2% — down from its peak of 7% last summer, but still above the Fed’s 2% target. Meanwhile, the primary interest rate sits at 5.25% – a peak not seen in 22 years. This climb follows a streak of 11 consecutive rate hikes since early 2022.

“The realisation that we are unlikely to see the Fed start cutting rates this year has weighed on gold. In fact, recent US macro data suggests that there is still the possibility that the Fed may have more work to do when it comes to monetary tightening,” noted ING analysts Warren Patterson and Ewa Manthey in a recent column.

Gold price forecast: Analysts point to strong dollar keeping gold down

Higher interest rates have seen 10-year real yields on U.S. Treasury securities (TNOTE10) hit their highest levels since 2009 recently, and they continue to hover around 2%. The stronger rate environment combined with USD (USDX) strength is not providing support for the gold price forecast.

“On the charts, gold has held support at the $1,900 area, but more dollar strength or rising yields would jeopardize the year-to-date,” read a MarketWatch report citing Tom Essaye, a former Merrill Lynch trader and founder of Sevens Report Research.

Essaye’s sentiment was echoed by German technology group Heraeus in its weekly precious metals report:

“Near term, a stronger dollar could depress the gold price. Interest rate futures now imply a 40% chance of a further rate rise by the end of the year, when not so long ago the next move was expected to be a rate cut. Additionally, speculative positions in foreign exchange futures are very short the US dollar at a level that historically has seen a reversal and the dollar strengthen.”

It is unclear whether the reprieve is temporary, as the fate of the commodity, typically seen as a safe-haven asset to preserve value in times of uncertainty, is tied to the likelihood of a U.S. recession.

Investors are waiting on more U.S. economic data this week — such as the ADP employment report on Wednesday and the core PCE inflation reading on Thursday — to guide the interest rate outlook and the gold price forecast for 2023.