Gold prices have been undergoing a sustained correction since March, primarily influenced by two key factors.
The first factor is the conflict between the US and Iran, which has pushed up oil prices and inflation, leading to market concerns about persistent US inflation and the formation of monetary tightening expectations.
The second factor is the market's interpretation of the June FOMC meeting, the first chaired by Walsh, as hawkish, which has intensified worries about monetary tightening.
Walsh emphasized inflation discipline, and the dot plot was revised upward for inflation expectations, with half of the 18 voting members supporting at least one interest rate hike within the year.
The current market narrative suggests the Federal Reserve's policy focus is "controlling inflation." Futures markets have already priced in one rate hike each in 2026 and 2027 to restore the credibility of the US dollar. A stronger dollar has put pressure on gold.
However, this correction in gold is not the end of the bull market, and a turning point may not be far away.
Key Drivers of the Recent Gold Correction
Since March, the price of gold has been adjusting, with international gold prices once falling below $4,000 per ounce, a decline of over 25% from the early March high of $5,321 per ounce.
The main drivers are the two factors mentioned: the US-Iran conflict boosting oil and inflation, and the hawkish interpretation of the June FOMC meeting under new leadership.
The market currently believes the Federal Reserve's priority is inflation control, with futures pricing in future rate hikes to support the dollar, thereby suppressing gold.
For these two prevailing logics, it is argued that linear extrapolation may be unwise.
US inflation may have already peaked and could enter a downward trajectory in the second half of the year.
Walsh's first meeting does not necessarily signify a complete shift by the Fed towards tightening; the current stance may be to leave room for a future return to accommodative policy.
Therefore, this gold correction is likely not the end of the bull market, and a reversal could be imminent.
Analyzing the Federal Reserve's Stance and Dollar Credibility
The Federal Reserve has not completely turned hawkish, and the credibility of the US dollar may not be smoothly restored.
The market's interpretation of the hawkish dot plot and Walsh's emphasis on inflation discipline as signals of policy tightening may be a misjudgment.
Walsh himself did not submit a dot plot forecast and repeatedly emphasized in the press conference that the dot plot is not accurate and may be frequently revised in the future, indicating its diminished guidance for future policy direction.
Therefore, the dot plot suggesting a Fed rate hike this year does not represent the actual future policy path.
Walsh's emphasis on inflation discipline in his first meeting is likely a routine move by a new official to establish public trust and should not be over-interpreted.
More noteworthy is Walsh's announcement of five task forces covering Federal Reserve communication, balance sheet policy, data usage, productivity and employment, and the inflation framework.
These may be aimed at rebuilding a framework to explain future rate cuts.
The communication task force could reshape the SEP, dot plot, and press conference mechanisms, reducing the risk of the Fed being constrained by forward guidance and a hawkish dot plot.
The market may shift back to focusing on growth, inflation, and employment data themselves.
The data sources task force is particularly crucial. Walsh has previously emphasized the "long and variable" lags of monetary policy, with effects often taking 6 to 12 months to transmit to the real economy.
Therefore, policy cannot wait for lagging data to fully confirm before turning, and more real-time, actionable indicators are needed to guide decisions.
Walsh favors the trimmed-mean PCE inflation measure, which excludes extreme components and is naturally less sensitive to volatile supply shocks like oil prices.
Currently, this measure shows lower inflationary pressure than traditional indicators like core PCE. If Walsh uses this more in the future to explain inflation, it could provide a data-based justification for earlier and faster rate cuts.
The inflation framework task force aims to examine inflation drivers, Fed responsibilities, inflation measurement, and achieving price stability from first principles.
Since the 1980s, the secondary effects of oil price shocks on US core CPI have significantly weakened. If the Fed re-differentiates between one-time price level shocks and persistent inflation, short-term disturbances like oil prices and tariffs may not justify monetary tightening.
The productivity and employment task force may incorporate AI into the policy reaction function. Walsh has repeatedly expressed confidence in AI boosting productivity. Historically, technological revolutions have often been deflationary forces.
If AI increases potential growth and reduces unit labor costs, resilient US growth may not correspond to higher inflation. In the short term, AI could suppress hiring in highly exposed sectors and push up unemployment, increasing the necessity for rate cuts.
Thus, AI could both reduce inflationary constraints and increase employment pressure, both paths pointing toward greater room for policy easing.
The establishment of the balance sheet task force also does not mean the Fed will aggressively shrink its balance sheet in the short term. Quantitative tightening could drain money market liquidity and easily trigger financial risks without sufficient regulatory and fiscal coordination.
A more realistic path might involve first promoting financial deregulation to enhance the financial system's capacity to absorb US Treasuries, alongside the Treasury issuing more short-term debt to ease financing pressure, before discussing balance sheet reduction.
This path could reduce the risks of quantitative tightening, help improve Treasury liquidity, lower liquidity premiums, and align with political desires for lower rates.
Overall, Walsh's first FOMC meeting may not represent the hawkish pivot the market currently perceives. The hawkish dot plot and reaffirmed anti-inflation commitment might be superficial, while de-emphasizing forward guidance and launching the five task forces may indicate the substantive policy direction.
Walsh's real intent may not be to hike rates immediately, but to construct a new institutional narrative for future rate cuts amidst high inflation readings, an expanding hawkish faction, and pressure on dollar credibility.
It is also premature to conclude that dollar credibility is being restored. US debt continues to accumulate, domestic and foreign policies may continue to strain US credibility, and Walsh's balance sheet tightening policies face political, economic, and market constraints, with highly uncertain progress and outcomes.
Policy statements from a single Fed meeting are insufficient to conclude that the trend of weakening dollar credibility has been reversed.
The Trajectory of US Inflation and Employment
Secondly, high US inflation lacks persistence. The summer may mark the peak, with inflation entering a downward channel in the second half of the year.
This round of US inflation has been primarily driven by oil prices, not a reacceleration of demand, and has not formed a wage-price spiral.
Beyond energy, rent, used cars, food, and other core goods all face downward pressure in the second half.
Recently, with a significant easing of US-Iran tensions, oil prices have fallen notably, approaching pre-conflict levels, suggesting the energy shock's boost to CPI may fade quickly.
The market's linear extrapolation of a single oil price shock into runaway inflation may overestimate inflationary risks.
Beyond inflation, US employment is not as strong as surface data suggests. The May non-farm payrolls added 172,000 jobs, above market expectations, but recent months' data has been volatile, and initial readings should not be linearly extrapolated.
Calendar effects, sample shrinkage, and model statistical flaws weaken the reliability of initial non-farm figures, with substantial subsequent revisions being common.
Since 2021, May's initial non-farm figures have been consistently revised downward, with a median revision of about 89,000 jobs. A similar revision this time would bring May job gains down to around 83,000, aligning with the view of a cooling labor market.
Overall, it is believed that US inflation will likely decline significantly in the second half of the year. By 2027, barring unexpected policy or geopolitical shocks, US inflation returning to around 2% is not a low-probability event.
Falling inflation and weakening growth will dampen tightening expectations and open space for the Fed to return to an accommodative policy stance.
Outlook for the Gold Bull Market
The gold bull market is not over, and a turning point may be approaching.
As analyzed, US inflation is likely to peak this summer, the labor market is cooling, and Walsh's reforms leave room for future Fed policy easing; a full-scale Fed shift to tightening is not expected.
As geopolitical and inflationary pressures gradually ease in the second half of the year, the probability of Fed rate hikes is low. Instead, the timing and pace of rate cuts could exceed market expectations, driving a return to US dollar liquidity easing and providing new support for assets like gold and stocks.
Therefore, the gold bull market is not concluded. June, with global inflation peaking and several central banks hiking rates, may be the period of greatest global liquidity pressure, making an accelerated gold adjustment unsurprising.
Entering July-August, with potential declines in US inflation and growth data or new policy guidance from Walsh, there is a possibility of a rapid reversal in the Fed tightening narrative. The turning point for the gold market is believed to be drawing closer.
It is also noted that gold can serve as a potential hedge against an AI bubble, providing risk diversification.
In summary, a positive outlook on gold's future performance is maintained. Maintaining positions, buying on dips, and awaiting a turnaround is advised.
Risks include US inflation data exceeding expectations and unforeseen changes in geopolitical situations.
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