All about Powell at Jackson Hole

Short-term, Powell’s Jackson Hole speech later today will determine both gold and the dollar’s moves. But their underlying trends are clear: the dollar’s is down, and gold’s is up. 

Gold and silver consolidated recent gains this week with gold looking overbought, but silver perhaps less so. In European trade this morning, gold was $2497, down $9 from last Friday’s close. Silver was $29.35, up 35 cents on balance.

It really has been a tale of two metals, as our next charts show.

Gold’s rise has been consistent since last October, seemingly defying the volatility in its Open Interest. Silver has seen a significant downtrend since May with Open Interest falling as you would expect. But since 8 August, silver has started picking up without Open Interest doing so. With the attention focussing on gold, silver is being ignored and looking positive.

Silver is left behind, with a gold/silver ratio of 85. But as the ratio chart shows, that could be set for a significant decline.

Silver does have some catching up to do if gold continues on its upwards trend. But in the very short-term, we have Powell’s Jackson Hole speech later today, which could drive prices either way. Let’s take a moment to think his position through.

This week, there was a shocking revision of non-farm payrolls, which turn out to have been exaggerated by 818,000 in the 12 months to last March, overstating the strength of the US economy. The implication is that with CPI inflation back towards target, the Fed has been wrong to hold off on interest rate cuts.

How does Powell climb down from this one? He will avoid statements likely to fuel a further decline in the dollar by raising hopes of declines in interest rates too much, because he will have an eye on funding the deficit. But that cat is probably already out of the bag, as the trade weighted index shows:

The death cross on the $TWI is the most bearish signal since mid-2020. While there is some short-term potential for the TWI to recover from its recent sharp decline, the bearish trend for it is clear. A September cut of 0.5% is already discounted, so Powell’s speech will be dissected for evidence that there could be further cuts to follow.

If so, that would be bearish for the dollar and equities because of the economic hard landing implications. But for gold, the opposite is true, with its chart standing in stark contrast with that of the $TWI.

After breaking out above a bullish flag formation (more obvious intraday) in the short-term gold is back testing the breakout level while the TWI looks ready for a small bounce. 

There you have it: don’t rule out more short-term consolidation/volatility of both trends for the $TWI and gold. But the primary direction for both is clear. And it won’t be long before the hedge funds continue to sell the dollar and buy gold as they resume their pair trades.