By Barani Krishnan
Investing.com - As gold plunged and the dollar and stocks took off Thursday minutes into Jay Powell’s speech on the Federal Reserve’s new inflation strategy, I was reminded about the observation on the “irrational exuberance” in markets made famous by the central bank’s one-time legend Alan Greenspan.
Greenspan, of course, was wondering aloud about the stock market when he made that comment in 1996. In his words, irrational exuberance could come from “amplifying stories that might justify price increases, bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.” Minutes after he spoke, the Tokyo bourse crashed, followed by an implosion in global stocks and Wall Street.
Fast forward to today: the Greenspan theory could be applied to the recent highs on the Nasdaq -- or, for that matter, gold. But my point in revisiting a Fed lore from nearly 25 years ago is that it’s pointless sometimes to expect logic in market moves. And this week’s most illogical move was the dollar rally triggered by Powell’s speech.
Let’s examine what the Fed Chair said. Powell proposed a policy of targeting average but higher inflation to better manage U.S. economic and employment recovery amid the coronavirus and other crises. The Monetary Policy Framework Review he laid out implicitly pledged not to raise interest rates till things were better -- meaning current rates of near-zero could stay for years. How either of these were helpful to the dollar beats me.
Yet, the greenback took off as Powell spoke, helped by an equally mystifying rally in Treasury yields. More amusing was seeing the financial community trying to explain away the market madness to so-called investor wisdom that the dollar will ultimately benefit because of the fiery rally going on now in tech stocks and the S&P!
To me, the only logical explanation for Thursday was the classic buy-the-rumour, sell-the-fact dynamic. Prior to Powell’s speech, the media and research units of banks and trading houses had flogged to death “news” that he was going to announce an average inflation target. So, there was virtually no element of surprise in his speech.
If anything, the Fed chair left out the one thing that traders wanted to hear more of — an unambiguous promise that the central bank will buy more assets (I don’t blame Powell for refusing to serve more opioids to these stimulus-hungry junkies; this was a speech on a new policy framework, not his monthly news conference on rates). With nothing to excite it anymore, the market decided to create its own excitement by shorting gold and sending the dollar flying.
Jeffrey Halley, one of the best market cynics out there, phrased it best, saying the Fed’s average inflation target was basically “an admission that recovery is not going to be the nirvana-like V-shape so often postulated by the gnomes of the stock market.”
“I expect the word ‘inflation’ to be twisted by the FOMO gnomes of the stock market into another bullish signal,” the Sydney-based market analyst for OANDA said. “Inflation means company earnings rise, yes? Buy Mortimer, buy.”
FOMO, or Fear Of Missing Out, is what prompts investors to load up on risk across various markets to profit from wherever possible.
Whatever the case, real wisdom returned to the market on Friday. The Dollar Index tanked back under the 93-point handle that it ought to have never gotten to over the past fortnight.
(For background: Prior to Thursday’s fiasco, the greenback also got an undeserving boost from the Fed’s July meeting minutes released on Aug. 19. On that occasion, the central bank telegraphed a well-intended reason for rejecting yield curve controls. Traders thought the Fed will resort to such action to keep rates lower for longer. When that didn’t happen, it was again ‘sell gold, buy DX’.)
In this column last week, I parodied -- with apologies to the scientific community -- Newton’s famous law on gravity, saying “what goes down, must also go back up”, referring specifically to gold. Since then, I’ve also postulated that the short-term correction in gold may not be entirely over. In other words, expect a rally, if you must, but one with attendant volatility.
So, what’s the upside for gold?
If the spot price, which got to a high of $1,976.60 in the just-ended week, manages to crack the $1,980, then the next target will be the most recently-imposing resistance of $2,015.45 set on Aug 19. Independent markets chartist Sunil Kumar Dixit also reminds us that any run-up in gold will invite a run-down in the dollar. “I expect DX to reach further down to the August low of 92.11, and take momentary support at 91.85,” he said.
But if gold breaks down at some point, Dixit said it could attempt to move back under $1,970 first, then $1967 and later $1,930 to $1,915.
In oil’s case, crude prices settled mixed on Friday but rose for the week after Hurricane Laura largely spared the U.S. energy industry from disaster — turning focus again toward sketchy demand for fuel in a coronavirus-moderated economy.
“Hurricane Laura spared key energy infrastructure from major damage, muting its impact on global energy markets,” TD Securities said in a note.
“In this context, market participants will return their focus towards the recovery in global energy demand, which continues to show signs of stalling. This comes amid virus flare-ups in Europe and Asia which threaten to derail the recovery in demand growth.”
Precious Metals Weekly Review
Gold’s gyrations continued on Friday as the yellow metal clawed back on Friday all of the previous session’s losses and more.
It was also a sign that logic was returning to financial markets which had been besotted over the last fortnight with a dollar that looked almost certain to lose from the central bank’s policy shift.
The benchmark December gold futures on Comex officially settled up $42.30, or 2.2%, at $1,974.90 per ounce, after Thursday’s drop of $19.90, or 1%. For the week, it rose 1.4%.
According to Investing.com data, December last traded on Friday at $1,973.00, up $40.40, or nearly 2.1%.
Friday’s session high in December gold — $1,982.85 — came in lower than Thursday’s $1,986.70. The latest peak was also some $30 short of its Aug 19 high of $2,015.60 and more than $100 away from the Aug 7 record high of $2,089.20. As of now, there’s no certainty if the swings of the past two weeks would recur, or if gold would continue rising in a more steady fashion.
The spot price of gold, which reflects trades in bullion, last traded at $1,964.39, up $34.71, or 1.8%, according to Investing.com data. Spot gold peaked at $1,973.88 on Friday. For the week, it rose 1.3%. Technicals show that a hold above $1,970 will be crucial for spot gold to continue its ascent.
Energy Weekly Review
New York-traded West Texas Intermediate, the benchmark for U.S. crude futures, last traded down 8 cents, or 0.2%, at $42.96 per barrel. For the week, WTI gained 1.5% on the week.
London-traded Brent, the bellwether for global crude prices, last traded the New York session up 27 cents, or 0.6%, at $45.87. Brent rose 1.6% on the week.
According to the Bureau of Safety and Environmental Enforcement, just about 40% of manned platforms in the U.S. Gulf of Mexico remained shuttered and without anyone on board on Friday, compared to the previous day when outage from Laura left 46.2% of the platforms idle.
Laura, the strongest U.S. hurricane in more than a century-and-half, made between east Texas and west Louisiana as a Category 4 hurricane at pre-dawn Thursday before turning into a tropical storm.
Aside from loss of at least six lives and countless property, the storm also scored a near-direct hit on Lake Charles in Louisiana where Citgo’s 769,000 barrels-per-day refinery is located. The refiner said all its employees were safe and damage was being assessed, indicating the situation was under control.
Energy Calendar Ahead
Monday, Aug 31
Private estimates on Cushing oil inventories from Genscape.
Tuesday, Sept 1
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Sept 2
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Sept 3
EIA weekly report on natural gas storage
Friday, Sept 4
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan does not trade or hold a position in the commodities and securities he writes about.