Spot gold's downtrend is limited, FED decision-making becomes increasingly difficult; U.S. urgently needs to reform a policy

On Wednesday (September 15), spot gold was under pressure, but the US dollar index dropped significantly, limiting the drop in gold prices. Previous data showed that the U.S. inflation rate last month was lower than expected, adding to the variables in the timing of the Fed's reduction of asset purchases. Investors have shifted their focus from inflation to the uncertainty of US economic growth.


At 20:04 GMT+8, spot gold price fell slightly by 0.05% to US$1803.62 per ounce; the main COMEX gold contract fell 0.12% to US$1804.9 per ounce; the US dollar index fell 0.20% to 92.469.


The Fed will hold a two-day monetary policy meeting next week. Investors are eager to understand whether the Fed will announce a reduction in bond purchases. Several Fed officials have hinted that the Fed may reduce debt purchases before the end of the year, but said that the eventual interest rate hike will not happen for a period of time.

Inflation year-on-year growth is still high

Data released on Tuesday showed that the core US Consumer Price Index (CPI), which excludes food and energy components, rose only 0.1% month-on-month in August, the lowest since February; the core CPI increased by 4.0% year-on-year, down from 4.3% in July. . This raises suspicions that the scale of debt purchases will be reduced this year.

But economists warn that it is too early to celebrate. Due to the expansion of the new crown vaccination coverage, companies can recall workers to their offices, and many Americans have relocated their residences from the countryside to the cities. Therefore, housing shortages are driving up record prices and rents. These factors may help maintain a high annual inflation rate.

Chris Low, chief economist at FHN Financial in New York, said: “Even if the monthly CPI increase slows down, the year-on-year increase will continue until 2022. The slowdown in the recovery of industries sensitive to the pace of economic restart has led to a temporary reduction in inflationary pressure, but other industries have increased Stability shows that upward pressure on inflation still exists."

Bill Adams, senior economist at PNC Financial in Pittsburgh, Pennsylvania, said: "In the next six months, the biggest upside risk to inflation will come from house prices. A sharp increase in house prices may be transmitted to the CPI."

James McCann, deputy chief economist at Aberdeen Standard Investments in Boston, said: “Even if it doesn’t blow up like earlier this year, inflation is still very strong. But if we continue to see further declines in inflation in the next six months, it should be. It will ease the pressure on the Fed to tighten policy."

Economists also expect that Fed officials will raise their inflation forecasts in the summary of economic forecasts released at the end of the policy meeting on September 21-22. The Fed’s preferred inflation measure—the core personal consumption expenditures (PCE) price index—increased 3.6% in the 12 months to July, which was comparable to the increase in June. The August data will be released later this month.

Therefore, the Fed is still expected to formulate a plan in November and begin to reduce its large-scale monthly bond purchase program. Cuts in debt purchases often benefit the U.S. dollar because it means the Fed is one step closer to tightening monetary policy. This also means that the Fed will purchase fewer debt assets, effectively reducing the number of dollars in circulation.

The focus shifts to economic uncertainty

Investors will shift their focus from inflation to the uncertainty of US economic growth. A government survey released on Tuesday showed that after the coronavirus pandemic severely disrupted the U.S. economy and forced people to lose their jobs, direct cash payments to families and generous unemployment benefits helped lift millions of Americans out of poverty.

The U.S. Census Bureau said the federal government’s stimulus payments to most American households during the pandemic helped lift 11.7 million people out of poverty last year. The report shows that the unemployment rate has soared due to the crisis, and the support provided by unemployment benefits has also helped.

But doing so also makes the supply chain bottleneck more obvious. As of the end of July, the number of vacancies in the US labor market reached a record 10.9 million, forcing companies to raise wages when competing for labor. The spread of the Delta mutant strain seems to have cast a shadow on the economic outlook, and it is difficult for gold to experience a unilateral decline.

Amazon on Tuesday raised its average starting salary to $18 an hour. And said that a signing bonus of US$3,000 will be paid in some places, and the hourly salary may rise to US$22.5. Amazon said in May that it would pay an average salary of about $17.

Fiona Cincotta, senior financial market analyst at City Index, said: “Slow inflation has caused investors to stop betting that the Fed may soon reduce bond purchases. A fall in inflation will reduce the pressure on the Fed to act prematurely. Evidence that the peak inflation has passed. It does seem to be increasing. However, supply chain bottlenecks are expected to continue for some time, so inflation is unlikely to drop sharply or rapidly."

The core problem: the parenting policy has to be changed

At present, the unemployment relief measures provided by the United States during the epidemic have ended. Some companies and legislators predict that reduced benefits will increase the number of job applicants. But economists said that this shift may force millions of job seekers to reduce spending, and economic growth may still slow down.

At the same time, the scarcity of childcare services and the fear of the virus may still make some people unemployed. President Biden and other Democrats are pushing for more investment in programs that can subsidize childcare expenses, permanently expand parent tax credits, and provide other supports for families.

U.S. Treasury Secretary Yellen and Vice President Harris on Wednesday (September 16) will urge Congress to support proposed spending on affordable childcare. The Ministry of Finance has previously stated that expanding the supply and demand of childcare services will have multiple positive spillover effects on wages, employment and all aspects of society, and will have a lasting positive impact on children, parents and the entire economy.

The Treasury Department stated: “The President’s proposal is critical to maintaining our economic success. A well-funded childcare department will help parents stay in the workforce, balance the workplace and family relationships according to the most applicable timetable for them, and realize the economy together. Prosperity."

However, Republicans in the United States firmly oppose the Democratic Party’s plan, saying that doing so will increase the tax burden of the middle class and the rich, which in turn will lead to reduced employment opportunities, economic slowdown and higher inflation. It is foreseeable that the US Congress will start a new round of see-saw on this issue, and the market's risk aversion will be difficult to eliminate in a short period of time.

Spot gold looks at $1838

On the daily line, the price of gold has started an upward (iii) wave trend from US$1779. The upper resistance looks at the 23.6% target of US$1816 and the 38.2% target of US$1838. (iii) Wave is a sub-wave that started the upward ((i)) wave from $1680.