Powell CFR speech to put the gold breakout on hiatus

The price of gold has just struck a 6-year high, having gained 9% so far in June. While bullish sentiment maybe a contrarian signal for a short-term pullback, we think gold has a lot further to go. We have moved our medium-term target for gold to $1680 per oz. It would take a fall below $1300 for us to reconsider.

Short term market dynamics have been working in favour of a rising gold price. The primary features are a weak dollar ahead of likely Fed rate cuts, narrowing US/RoW yield spreads and rising geopolitical tensions between the US & Iran.

Gains in gold extended on Tuesday when the Iranian foreign ministry, in response to the fresh sanctions imposed by President Trump, said the US-Iran diplomatic path is closed “forever”. Forever is a long time! But it seems tensions between the US and Iran will remain high for a while, underpinning gold as well as oil prices.

The biggest near-term risk event for gold is Fed speak later today. Federal Reserve policymakers Bostic and Chair Powell speak at 17:00 and 18:00 BST respectively. Jay Powell is scheduled to speak to the influential Council on Foreign Relations about the economic outlook and monetary policy.

Markets have now fully priced in a rate cut at the July meeting and we think a rate cut in July is a done deal. It is now up to Mr Powell to manage these market expectations. Central banks have clearly made a dovish pivot and we don’t think he will undermine that. More talk of doing what is ‘appropriate to sustain the expansion’ seems likely. We do think he will try to dispel the idea of a 50 basis point cut in July. That could give the dollar some respite, and see gold pull back short term before the G20 summit.

US Opening Calls

Dow Jones to open 2 points higher at 26,729

S&P 500 to open 2 points lower at 2943