Gold in focus as we wait for Fed confirmation hearing

• Could gold hit $5,000 per ounce?
• Stephen Miran to be tested on his desire for an independent Fed
• Any signs that he will be influenced by Trump could lead to fears about inflation and Fed credibility
• Gold could trump Treasuries in this environment

Bond market calm has persisted on Thursday, and this is having a positive effect on risk sentiment. Stock markets are mildly higher, although we expect returns to be small as we wait for the key Non Farm Payrolls release on Friday.

GS analysts bullish on gold

As risk sentiment recovers, the gold price is in retreat. It fell $30 at one point on Thursday; however, it is now down $14, as investors ‘buy the dip’. We expect the gold price to remain supported for the foreseeable future, and we are not the only ones. Earlier today, Goldman Sachs released a report saying that gold could rally to $5,000 per troy ounce if the Federal Reserve’s independence is eroded.

Miran’s Trump ties to be scrutinized

This comes at a delicate time for the Federal Reserve and its relations with the White House. Later today the Senate Committee will hold a confirmation hearing for President Trump’s latest pick to serve on the Federal Reserve board and set interest rates in the future. Stephen Miran will testify to the committee. He is a White House economic advisor, and he is seen as an overtly political pick from Trump, who will allow the President to more directly influence interest rate policy in the future.

While Miran’s confirmation is not in doubt since the Republicans hold a Senate majority, this hearing could have big implications for financial markets. Firstly, the market will be watching to see if the Republican Senate members defend the Fed’s traditional independence from White House interference, or if they accept that the President will have more influence over interest rates. Some Republicans, but not all, have come out and publicly defended Fed independence. If others fail to so this, it could trigger concerns about the integrity of the Fed, which may spook investors.

Miran needs to persuade market of his independent rate-setting abilities

Secondly, the market will want to hear how Miran will defend the Fed’s independence, especially since he has called for greater oversight at the Fed in the past. We expect that Miran will say all the ‘right’ things today to deflect attention from  President Trump’s influence on his policy making abilities. However, if he slips up, or does not convince the market that he will be adequately independent from the White House then we expect markets to react. This could include a big spike in the gold price and a sell off in Treasuries, as investors start to get concerned about inflation.

Inflation is a key concern

This leads us to one of the pivotal points to listen out for in today’s hearing. What does Stephen Miran think about lower interest rates when inflation is running above target? In the past he has been considered an inflation hawk, however, if he does not sound concerned enough about the inflation risks to the US economy then this could add to fears about stagflation, and trigger another global bond market sell off.

Miran is a replacement Fed pick, and his term is up in January, when he could return to the White House. However, even this is controversial. Having a member of the Fed go from a rate-setting position straight back to the White House would be highly unusual and could lead to more speculation about official meddling in interest rate policy.

The risks from an erosion of Fed independence

Analysts at Goldman Sachs say that a scenario where Fed independence is compromised could lead to gold surging to $5,000. They say that this could lead to higher inflation, push up long-term bond yields and erode stock prices. It could also challenge the dollar’s position as a reserve currency. The bank say that a move of just 1%  of the privately-owned  Treasury market into gold could push the price of the yellow metal to this dizzying high.

Thus, if you think that Miran’s position at the Fed is likely to lead to an erosion of Fed independence then a positive outcome from today’s committee hearing at the Senate could lead to a sustained recovery in the gold price and a push back above record highs.

Chart 1: The gold price, 12-month chart. Trump’s second term as President has coincided with a 30% increase in the gold price so far this year, as investors diversify into gold as a hedge against the President’s desire for lower interest rates and the inflation risks that this could unleash.

Source: XTB and Bloomberg