Gold's rally hits a speed bump, but analysts see 40 trillion reasons to stay bullish

(Kitco News) - The gold market may have 40 trillion reasons to go higher through the rest of the year, but analysts say that renewed expectations that the Federal Reserve still needs to fight inflation could add some volatility to the market next week. After starting the week with a push toward $4,700 an ounce, gold’s five-week winning streak has come to an abrupt halt. The gold market is ending the week near support at $4,500 an ounce following what analysts have described as hawkish comments from Federal Reserve Chair Kevin Warsh. Spot gold last traded at $4,473.80 an ounce, down 2.74% on the day. Friday’s selloff has pushed prices down by nearly 3% for the week. In his much-anticipated speech at the Annual Central Bank Symposium in Jackson Hole, Wyoming on Friday morning, Warsh reiterated the U.S. central bank’s commitment to bringing inflation down to its 2% target. He said that the Federal Reserve’s price-stability mandate is more of a concern than the slowing labor market. “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job . . . our mandate . . . and our charge to keep,” he added. Following Warsh’s comments, markets started to reprice the possibility of a rate hike in September. According to the CME FedWatch Tool, markets see a 55% chance of a rate hike next month, up from roughly 40% before Warsh’s speech. Although gold has hit a significant speed bump, many analysts have said that the threat of a rate hike hasn’t derailed the broader market. David Morrison, Senior Market Analyst at Trade Nation, has been warning investors that gold has become overbought over the last five weeks. “ Gold is still a touch overbought, which is unsurprising given its strong rally this month. It looks to me as if gold, along with silver, still has plenty of upside potential for the rest of this year, and maybe beyond. But today’s price action has put a kink in its progress, and it could provide the catalyst for a more substantial pullback,” he said. “That may rattle some buyers, but it could also shake out the weaker hands and provide a new base which should help prices reset, and give momentum an opportunity to rebuild at lower levels. There are plenty of fundamental reasons to hold gold, and I can think of 40 trillion of them just off the top of my head." Neil Welsh, Head of Metals at Britannia Global Markets, said that gold’s sharp selloff Friday makes sense as Warsh’s comments have supported the U.S. dollar and pushed bond yields higher. However, he said that he doesn’t expect Warsh’s comments to derail gold’s long-term uptrend. “The market is heading into month-end with gold still up around 10% in August, one of its strongest monthly performances in recent memory, supported by a combination of fiscal concerns, Treasury market developments and continued demand for portfolio diversification amid economic uncertainty,” he said. "A single hawkish speech can trigger profit-taking, but it is unlikely on its own to overturn a rally that has been driven by much broader macro forces." Simon-Peter Massabni, Head of Business Development at XS.com, said that Warsh’s Jackson Hole speech was hawkish enough to put renewed pressure on gold but does not provide sufficient evidence to call an end to the gold rally. “The bigger battle is no longer simply between gold and interest rates. It is a broader conflict between restrictive monetary policy on one side and rising debt, fiscal risks, economic uncertainty, and financial-market vulnerabilities on the other,” he said. “For that reason, I believe the market has entered a phase where patience is more important than chasing price.” Bill Adams, Chief U.S. Economist, Fifth Third Commercial Bank, said that although markets are back to pricing in a rate hike next month, a lot can still change between now and Sept. 16. “Warsh's Jackson Hole speech signals openness to a hike--but the FOMC said the same thing at the last two meetings, yet held steady,” he said. “However, the bar to a hike will likely look higher next week, since payrolls will likely fall in the August jobs report.” Although the threat of an impending rate hike continues to hang over the market, a growing number of analysts are skeptical that the Federal Reserve will be able to get inflation under control as U.S. government debt remains on an unsustainable path higher. In an interview with Kitco News earlier in the week, Larry Lepard, Managing Partner at Equity Management Associates, said that even if the Federal Reserve were to raise interest rates once or twice this year, it wouldn’t be enough to stop inflation from moving higher. He explained that, with government debt now above $40 trillion, the government can’t afford materially higher interest rates. “The math is not going to work for [Warsh],” he said. “I don’t see how we get out of this without either very high inflation for a bunch of years, kind of like So