Jackson Hole 2017 And Gold

The 2017 Economic Symposium at the end of August took place in Jackson Hole. What does it imply for the gold market?

Yellen’s Speech And Gold

The annual Jackson Hole Economic Policy Symposium in Wyoming is behind us. Since we were on short vacation, we were not able to cover that event earlier. Fortunately, it’s not a big loss, as both Yellen and Draghi did not provide any monetary policy guidance. Let’s analyze their remarks now, starting with the former speech.

Yellen delivered a speech entitled “Financial Stability a Decade after the Onset of the Crisis”, in which she defended the financial regulation introduced after the financial crisis of 2007-2009. According to her, the reforms boosted the resilience of banks (as, for example, the loss-absorbing capacity among the largest banks is significantly higher) and strengthened the U.S. financial system. Yellen did not send any explicit hints regarding the future course of the Fed’s monetary policy, but some analysts speculate that the increased safety of the financial system highlighted by Yellen might keep the Fed from raising rates any more this year given the recent softness in inflation, as it does not have to be very worry about financial imbalances created by the ultra-low interest rates. Indeed, the market odds of the Fed hike in December slightly decreased from 46.8 percent one month ago to 43.3 percent currently. This dovish message implied in Yellen’s remarks should be positive for the gold market.

Moreover, some Fed watchers also speculate that Yellen’s speech was likely her last speech at Jackson Hole, as her defense of the post-crisis tightening of financial regulation is at odds with the position of the White House. This is why her chances of reappointment as the Fed’s chair decreased after her remarks. It’s difficult to assess the impact of her possible replacement on the gold market – however, Yellen’s key rival, Kevin Warsh, would be more hawkish, which could be bad for the yellow metal.

Draghi’s Comments And Gold

Draghi delivered a speech entitled “Sustaining openness in a dynamic global economy”. In line with previous rumors, he did not provide any monetary policy clues. Thus, as Paul Mortimer-Lee, chief market economist at BNP Paribas, joked, “it looked as if ECB President Draghi and Fed Chair Yellen had competed to see who could produce the speech least relevant to monetary policy. We call it a 0-0 draw.” Instead, Draghi warned about trade restrictions, as he noted that to foster economic growth we need to raise productivity – and this depends on openness to trade. Hence, both speakers criticized Trump’s policies, such as dismantling financial regulation and the drift toward protectionism.

Market reaction to Draghi’s speech was limited, but the EUR/USD exchange rate rallied further after his remarks and the whole conference, hitting a two-year high, as one can see in the chart below.

Chart 1: EUR/USD exchange rate over the last 10 days.

The depreciation of the US dollar pushed the yellow metal above an important level of $1,300. However, the renewed concerns about North Korea also contributed to the recent rise in the gold prices.

Conclusions

The key takeaway is that Draghi and Yellen’s remarks at Jackson Hole were rather dull this year and did not reveal anything about the future course of the monetary policy. Hence, the impact of the conference on the gold market was limited. However, the lack of any surprises may also be important for investors. As Draghi did not express any concerns about the recent appreciation of the euro against the U.S. dollar, he effectively enabled EUR/USD bulls to take the shared currency higher. The rising euro should be bullish for the gold market, at least until it forces Draghi to intervene and send some dovish signals. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

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