Gold (XAU/USD-Spot) made a 4-week high around 1795.29 Thursday on escalating China-Taiwan military tension and hopes of a Fed/Powell pause. Gold was already buoyed after Fed’s meeting on 27th July, in which although Fed hiked +0.75% as unanimously expected, the market presumed by Powell’s Q&A talks that Fed may slow down or even take a pause in September, November, and December. But details of Powell’s presser (Q&A) and subsequent statements by various Fed policymakers show that Fed is on the way to hiking either +0.75% or +0.50% in September depending upon the inflation trajectory for August and September. Further Fed may hike @+0.50% in November and December if the inflation trend stays at the current level; otherwise, Fed may continue to hike @+0.25% if inflation cools down meaningfully or @+0.75% if it boils further.
Gold was hovering around 1720 before Fed and jumped to 1775 levels after Fed by 1st August and further surged to 1795 levels on 4th August on the old appeal of a haven asset amid Chinese war drilling over Pelosi’s visit to Taiwan. On Thursday, China escalates its military exercise encircling Taiwan. Chinese state-sponsored media even termed current military drills involving Taiwan a rehearsal for ‘Reunification Operation by Force’ after U.S. House Speaker Pelosi visited the island nation for a few hours.
Gold further jumped Thursday evening after Japan's Foreign Ministry said five Chinese missiles fired had landed within Japan's exclusive economic zone (EEZ), while Taiwan's defense ministry, said 22 more Chinese air force jets have buzzed its airspace. China sent hundreds of jets around Taiwan airspace as a part of a military drill and also fired hundreds of missiles to satisfy the domestic audience. Meanwhile, tourists in Taiwan are also scrambling to the sea beaches to observe Chinese PLA military drilling!
China may be planning to invade/annex some barren islands surrounding Taiwan this time (Nov’22 US mid-term election) or before Nov’24 US Presidential election. The market is concerned about a bigger conflict as 3 US carrier groups namely the aircraft carrier group USS Ronald Reagan & the amphibious assault groups USS Tripoli & USS America are in the vicinity of Taiwan against similar Chinese aircraft carriers.
Overall, if China ends its 5-day military drill over Taiwan by Sunday, then it will be fine and risk trade may soar from Monday; otherwise, expect more pain for Wall Street and Gold will soar further if China decides to extend the Taiwan military exercise further. As China is an export-oriented economy, it may not risk a recession by an all-out invasion of Taiwan.
Also, the U.S. is now making a reconciliatory statement to satisfy China as both the superpowers are dependent on each other for economic prosperity and development despite underlying cold war rhetorics for the sake of domestic political compulsions. Moreover, if China invades Taiwan, then it will result in another wave of economic sanctions and supply chain disruptions, resulting in elevated inflation, further Fed hikes, and a synchronized global recession.
On Friday, Gold slipped from 1795.29 after China imposed some symbolic sanctions on US House Speaker Pelosi and stops some military and climate talks with the U.S. over Pelosi's ‘adventurous’ trip to Taiwan. China said it will stop working with the U.S. on climate change, drug enforcement, and some military coordination. The market assumed that China may stop its military exercise on 6th August (Sunday) as scheduled and take some symbolic diplomatic steps against the U.S. The U.S. is also trying to lighten the situation and said China is overreacting with Pelosi’s ‘personal trip’ to Taiwan and it does not change U.S. policy (One China) towards Taiwan. Pelosi also echoed the same White House tone over Taiwan policy. As per the latest report mid-Sunday, China may also conduct another live war/fire drill in the Yellow Sea (near Korean Strait) from 6th to 15th August.
On Friday, Gold further slips and made a panic low of 1764.88 on better-than-expected/blockbuster July NFP job additions (as per establishment survey data) along with positive revisions for May and June. The July NFP job report may be a blockbuster if we consider the Establishment survey data. After the NFP headline, the FFR put more probability of another +75 bps rate hike by Fed in September, and thus Gold crumbled, while USD surged. But if we go through Household survey data, which Fed follows, the overall job/labor market is mixed. But even then, it will not change Fed’s plan for rate hikes in the coming months as Fed will solely go by inflation data. Thus the overall impact of July NFP job data is quite limited even after the usual volatility (knee-jerk reaction). Gold recovered at EOD to some extent to close around 1774.15.
Fed is on the way to hiking +0.50% or +0.75% in September followed by +0.50% or +0.25% each in November and December irrespective of labor market conditions as inflation/price stability mandate is now its prime objective. Fed is quite upbeat about the U.S. economy/labor market despite 40 years of high inflation. Fed still believes in a softish landing. But Fed is quite concerned about sky-high inflation and inflation expectations for 1Y.
Thus Fed goes for a restrictive/jumbo hike of +0.75% in June and July to bring down inflation expectations meaningfully. Now Fed is set for +0.50% or +0.75% rate hikes in September depending on the inflation trajectory. Then Fed may go for +0.25% or +0.50% rate hikes in November and December subject to the inflation trajectory. Fed may also go for +0.75% rate hikes in November and December if inflation accelerates further.
Overall, the Dec’22 terminal rate may be +4.00% to +4.75% as per the actual inflation trajectory, if Russia-Ukraine/NATO geopolitical tensions and subsequent economic sanctions continue. Moreover, if China invades Taiwan, then it will result in another wave of economic sanctions and supply chain disruptions, resulting in elevated inflation. Fed will also accelerate QT from September, which may be equivalent to +0.50% rate hikes. All of these may result in higher bond yields and lower Gold. But if China-Taiwan/US geopolitical tension lingers it will also boost gold.
Looking ahead, whatever may be the narrative, technically now Gold has to sustain above 1803-1808 for a further rally to 1822/1830-1835/1850-1860/1877; otherwise sustaining below 1800-1796, Gold may again fall to 1778/1766-1755/1742-1735/1700 and 1690/1680-1675/1660 in the coming days.
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Thanx for good newsLike 1