Gold and Silver Soar After Stable Inflation Reading

 

Gold and Silver Soar After Stable Inflation Reading

(Bullion News Network) – Gold and silver prices soared on Friday. The spot price of gold gained over $32 per troy ounce, cruising past $3,450/ozt to set a months-long high. Silver prices logged an even more impressive run, gaining nearly $0.90/ozt and crossing $40 per troy ounce to round out an otherwise slow trading week. The price action heavily favored silver, driving the gold-silver ratio over one point lower to 86.30:1. The price action comes on the heels of a relatively stable inflation reading that saw consumer prices fall in line with forecaster expectations in July. The Personal Consumption Expenditures (PCE) report for July may help the Federal Reserve move forward with a 25 basis point rate cut in September, which Fed Chair Jerome Powell hinted seemed likely at last week’s annual Jackson Hole Symposium.

Speaking to reporters last week, Powell had this to say about how the FOMC may vote heading into its September meeting:

The shifting balance of risks may warrant adjusting our policy stance.

CME FedWatch projects a high probability that the Fed’s September decision will fall in line with Powell’s prediction. The group currently projects an 86.9% probability that the Fed will vote to cut rates by 25 basis points in September, up from 84.7% one week ago and 63.3% last month. At last week’s symposium, Powell reiterated his concerns that tension between inflationary and labor market risks may create a challenging situation for the Federal Reserve as it attempts to achieve its dual mandate of stabilizing prices and maximizing employment:

Risks to inflation are tilted to the upside, and risks to employment are to the downside – a challenging situation.

This was not the first time the economist expressed concerns that the FOMC may need to risk either price stability or labor strength in order to boost the other part of the mandate. After the Fed’s May meeting, Powell told reporters that the evolving economic landscape, including the historic slate of tariffs introduced by U.S. President Donald Trump, may complicate the Federal Reserve’s calculus as it works to cut rates without placing undue inflationary pressure on the American economy.

We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close. For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.

Cutting interest rates decreases borrowing costs for businesses, which can improve the labor market by allowing businesses to spend more on new hires and benefit from increased economic activity from consumers. The Federal Reserve is expected to cut rates to respond to recent labor reports, which suggest that the American job market may be cooling at an alarming rate. However, cutting rates also reduces borrowing costs for consumers, which can lead to heightened demand for goods that outpaces supply, driving prices higher. This is the core challenge that the Fed currently faces, according to Powell. While cutting rates could help the Federal Reserve strengthen the U.S. labor market, doing so may also increase prices for consumers. 

Gold and silver prices jumped on the recent inflation report. Since inflation numbers remained elevated but fell in line with most forecasts, analysts believe the Federal Reserve is still on track to cut rates when it meets again in September. Silver saw the larger jump, crossing $40 per troy ounce to set a new 13-year high. Gold prices also jumped, securing a months-long high amid rate cut optimism. Safe haven assets tend to thrive in periods characterized by falling interest rates, since cutting rates is typically an inflationary action, and inflation often leads to higher prices for assets like gold and silver. The gold-silver ratio dropped by around one point lower to 86.30:1.