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Fed's Powell Says A Long Trade War Could Hurt U.S. Economy

Fed's Powell Says A Long Trade War Could Hurt U.S. Economy

Release Date:  Friday, July 20, 2018

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Gold and Silver Prices

Gold closed higher Friday, making up for some earlier in the week losses but ultimately ended lower for the week. President Trump's commentary regarding his frustration with the Fed's interest rate raises and the U.S. dollar accounted the increase in gold prices.

"'Now, you would argue that the Fed is independent and President Trump's musings would have no impact on Fed policy and this is merely a reaction to an oversold condition and the comments spooked the [gold] shorts,' said Peter Hug, global trading director with Kitco Metals. 'But it may be the beginning of a bigger policy, whereby the U.S. wants to drive the dollar lower to make U.S. goods less expensive and offset some of the damage caused by reciprocal tariffs being proposed by our trading partners.'

"'We do expect some renewed demand for gold as a haven, or as an inflation hedge, to boost the price to $1,300 per ounce by end-2018,' said the Capital Economics commodities research team, in a note.

"'The medium-term outlook for gold is more positive in our view, as we expect the Fed to stop raising rates in 2019. The U.S. economy is also likely to slow next year which, coupled with lower yields and a weaker dollar, would probably give a lift to the price of gold,' they said." ("Gold prices end higher to pare weekly loss, as Trump's remarks slam dollar," Myra P. Saefong, Market Watch, 07/20/18.)

Gold ended the week down $9.10, closing at $1,231.30. Silver ended the week down $0.27, closing at $15.51.

Fed's Powell Says A Long Trade War Could Hurt U.S. Economy - Jenkins

Federal Reserve Chairman Jerome Powell believes long-term tariffs could hurt the economy.

"A trade war with China, the European Union and other trading partners is casting some doubts about the U.S. economic future, Federal Reserve Chairman Jerome Powell said Tuesday.  

"And the longer it goes, the more potential harm it could cause, Powell told the Senate Banking Committee at a hearing about the Fed's monetary policy and the economy.

"He said the central bank expects the economy to remain strong, but trade could complicate the Fed's forecasts. '... it is difficult to predict the ultimate outcome of current discussions over trade policy,' he said in his prepared testimony.

"Later in the hearing, Powell said: 'If it results in broader, higher tariffs across a broad range of traded goods or services that remain that way for a longer period of time, that will be bad for our economy and for other economies too.'
"While senators' questions swirled around the unemployment rate, inflation, wages and the labor market among other things, one point of hot contention was the concern Americans have about a trade war's potential effects on the economy.

"Senators representing largely agricultural and industrial states tended to express the most concern. Powell largely deflected the questions, saying the Fed doesn't determine trade policy.

"'I'm going to try to walk the line ... and not comment on any particular policy. But, in principle, open trading is good,' Powell said.

"He emphasized the uncertain nature of the Trump administration's current trade policy.

Ultimately, Sen. Heidi Heitkamp, D-N.D., cited a speech from former Fed Chairman Ben Bernanke in an attempt to get Powell to be more specific.

"'Would you agree with Bernanke when he said in a 2007 speech on trade that restricting trade by imposing tariffs, quotas or other barriers, is exactly the wrong thing to do for the economy?' Heitkamp asked.

"Powell's reply was simple: 'Assuming you're talking about them remaining in place over a sustained period of time. Absolutely.'" ("Fed's Powell Says A Long Trade War Could Hurt U.S. Economy," Cameron Jenkins, NPR, 7/17/18.)

Trump Pushes Gold Higher; 'Not Thrilled' With Fed Raising Interest Rates - Christensen

President Trump is not happy about the Fed's interest rate raises with trying to improve the economy.

"President Donald Trump has rescued the gold market as prices have significantly bounced off their lows following his criticism of the Federal Reserve.

"Thursday, in an interview with CNBC, Trump expressed his frustration with the U.S. central bank saying that he is 'not thrilled' with rising interest rates. He added that higher interest rates could disrupt the nation's economic recovery.

"'I don't like all of this work that we're putting into the economy and then I see rates going up,' he said in the interview.

"'Because we go up and every time you go up they want to raise rates again. I don't really — I am not happy about it. However, at the same time, I'm letting them do what they feel is best.'

Gold has benefited from Trump's comments, with prices rallying more than $10 since the interview was published.

"Trump's take on the U.S. monetary policy has taken some political pundits by surprise as the central bank is seen as apolitical.

Trump's statements come the day after Fed Chair Jerome Powell, who was appointed by Trump, presented a relatively optimistic view on the U.S. economy and labor market to Congress.

"'The FOMC believes that--for now--the best way forward is to keep gradually raising the federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses,' he said. 'On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective.'

In June, the Federal Reserve signaled that it could hike interest rates two more times this year after already raising rates three times in 2018." ("Trump Pushes Gold Higher; 'Not Thrilled' With Fed Raising Interest Rates," Neils Christensen, Kitco News, 07/19/18.)

Now Is A Good Entry Level For Gold: World Gold Council - Lin

The World Gold Council sees current gold prices as a good entry level as it sees gold driving higher by factors such as rising inflation and trade wars.

"Gold's current price presents an attractive entry point as investors should expect macro trends to boost the yellow metal's relevance in the coming months, according to the World Gold Council (WGC).

"'Gold's recent pullback is supportive of consumer demand, as low prices tend to spur buying; at the same, it may provide attractive entry levels for investors,' the WGC said in its latest report Thursday.

"The analysts at the WGC make the case that three critical macroeconomic forces will drive gold's behavior in the second half of 2018: positive but uneven global economic growth, trade wars, and rising inflation and an inverted yield curve.

"'Gold's long-term returns are positively linked to economic growth, but its short-term performance is more sensitive to risk and uncertainty,' the report said, 'And gold's dual nature could benefit from key macroeconomic trends developing in the second half of the year.'

"China, India, and the U.S. may all see an economic expansion that would be beneficial for consumer demand for gold, said the report.

"Despite escalating trade war rhetoric, the equities markets have largely shrugged off risks or at least discounted its long-term effects, said the WGC. However, tariffs could eventually weigh down on economic growth and weaken the dollar, which would be a positive for gold, according to the WGC.

"Inflation has been slowly rising and is now at 2.9% in the U.S., which is higher than the 2% target inflation rate set by the Federal Reserve. The WGC said that inflation may continue to increase in light of higher tariffs being imposed.

"'Looking forward, the expansion of protectionist economic policies has significantly increased the risk that inflation will accelerate further. And companies facing higher tariffs will likely pass the bill to consumers,' the report said.

"Analysts at the WGC added that historically, investors have used gold as an inflation hedge and the yellow metal has seen prices increase substantially when inflation rises above 3%.

"The WGC noted that three factors have likely held gold back: a strengthening U.S. dollar, higher investor threshold for headline risk, and soft physical gold demand." ("Now Is A Good Level For Gold: World Gold Council," David Lin, Kitco News, 07/19/18.)

Gold on rebound? Look what is giving the metal the strength - Hirani

Inflation, interest rates still being low and less room for the Fed's to hike up interest rates all work in favor of gold.

"Gold has seen some rough weeks. For the past five months, it has been trading in sideways consolidation and then, the expected sell-off happened. Short covering in gold proved very short-lived and now, it's near its support zone of $1,345. There are some points that work in favor of gold.

"First is inflation, which has started to gather momentum. Inflation is crucial to gold prices, after of course the dollar. Inflation has started to gather momentum after crude oil prices started spiking upwards. Until now, inflation was kept artificially low by advanced economies by monetary manipulation and staggering deficits.

"US CPI (consumer price index) is at 2.8 per cent…the main contributor is oil prices, but the prices of crude started accelerating from start of this year. US inflation has started rising from last year.

"Let us exclude volatile items such as food and crude prices. If we take out crude prices, which expanded maximum after food, US CPI should be steady. However, despite excluding food and energy, the core CPI is increasing. This means that inflation indeed is increasing and crude prices are not to be blamed entirely. This is a good sign for gold, which is used as a hedge against rising inflation.

"Second point is the interest rate, which is still low if we take into account rising inflation…Yield curves are extremely flat right now and the 30-year yield is just delivering 24 basis points more over 5-year yield. This is remarkable that if one holds 30-year US government bond, they are getting just more 0.24 per cent per year than holding 5-year debt.

"Also, if the inflation rate is over 2 per cent, what incentive investors will get in a return of 2.97 per cent for 30 years? This phenomenon could reduce demand for long-term US debt and the funds will eventually flow into other asset class like equity or gold.

"The short-term 2-year US Treasury yield is at 2.57 per cent and US CPI at 2.8 per cent, which means bonds that are considered safe havens are giving negative real rate of return.

"Third reason is there is less room for the US Fed to hike interest rate. Gold investors are forward looking. The Fed has so far hiked seven times interest rate since December 2015. It is now deep into tightening cycle.

"Now, the US central bank has limited room as Fed funds rate now stands at 1.75-2 per cent…rate increase should be topped out around 2.9 per cent levels. This means there will be room for just four more hikes.

"The ECB will start winding down its bond buying programme from December and may start to lift its interest rate from summer 2019. So, ECB will be starting to hike rates when the Fed will be running out of steam. This will be bullish for the euro and gold as well.

"…the backdrop is still very constructive for gold, considering elevated inflation, low interest rates, a very high gold to silver ratio, an overextended dollar, and several other factors. Ultimately, it seems likely that gold is near a significant bottom here, should stabilize, rebound, and possibly move substantially higher into year-end and beyond." ("Gold on rebound? Look what is giving the metal the strength," Aasif Hirani, The Economic Times, 07/19/18.)