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More Upside as Powell’s Dovish Stance Makes Gold Shine?

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Jerome Powell takes a dovish stance

In prepared remarks ahead of his testimony to US Congress, Federal Reserve Chair Jerome Powell leaned toward a dovish stance. He said that the US inflation outlook seems muted and remains lower than the FOMC’s 2% target.

Market participants were worried that a better-than-expected June jobs report might have damaged rate cut prospects. Powell, however, laid these concerns to rest. He said that the report hadn’t changed the Fed’s outlook on the economy and interest rates. As reported by CNBC, he said, “I think since the June meeting and, even for a period before that, the data have continued to disappoint and that’s very broad across Europe and around Asia and that continues to weigh.”

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Weaker economic data

Powell also pointed to weak manufacturing, trade, and investment data around the world. He also reckoned that the recent trade truce between the US and China didn’t remove the uncertainty weighing on the US economic outlook. Global trade and global PMI (purchasing managers’ index) data are worsening. At 49.4, the global manufacturing PMI reading indicated a contraction in the manufacturing sector in June. The data also indicated a faster rate of contraction than in May, when the reading was 49.8. Out of 30 countries, 18 showed contractions, including China, Japan, Germany, and the United Kingdom. In contrast, the US, India, Brazil, and Australia signaled growth.

Gold is surging

In the aftermath of Powell’s dovish leanings, the stock markets are hitting all-time highs. The S&P 500 Index (SPY) has topped 3,000 for the first time. At 1:00 PM PM ET, it was up 0.52%. In addition to the markets, gold has also gained handsomely. At 1:00 PM ET, the SPDR Gold Shares ETF (GLD) was up 1.05% for the day. Gold gained 8% in June alone, with Fed rate cut expectations and a weaker US dollar being the main drivers behind its surge.

Gold shines on the Fed’s dovish stance

As Powell’s comments pointed toward a rate cut in July, gold prices surged once again. Gold doesn’t yield anything in terms of regular income, so lower interest rates increase investors’ interest in gold and make it competitive with other assets. Lower US interest rates also diminish the US dollar’s (UUP) appeal as yields on US Treasuries (TLT) fall. After the Fed’s dovish comments, the Invesco DB USD/Bullish Fund (UUP) was down 0.4% as of 1:00 PM ET.

In Gold Breaches $1,400: What’s the Next Stop? we discussed the drivers of gold’s price outlook and how most are trending in the right direction for higher gold prices.

Many hedge fund managers have also been recommending gold to investors lately to shield them from uncertainty. Jeffrey Gundlach, Paul Tudor Jones, Stanley Druckenmiller, and Mark Mobius are a few of the renowned investors who have been recommending gold lately.

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