Yellen testified yesterday before the Congressional Committee on Financial Services. What do her remarks mean for the gold market?

On Wednesday, Janet Yellen, the Federal Reserve Chair, testified before the Congress. In her prepared remarks, she noted that since her last appearance before this committee in February, the labor market had continued to strengthen. Although economic growth has been moderate so far this year, it has rebounded in the second quarter. Inflation has been soft recently, but these lower readings are “partly the result of a few unusual reductions in certain categories of prices; these reductions will hold 12-month inflation down until they drop out of the calculation.”

In short, everything is great, according to Yelen. However, her introductory remarks were interpreted as rather dovish, or less hawkish than expected. Indeed, the market odds of the December hike diminished somewhat, while the Dow Jones rose to a record high close. The price of gold also increased after the testimony.

Chart 1: Gold prices over the three last days.

When it comes to the Q&A session, it was without fireworks. As usually, Yellen skillfully avoided answering difficult questions. For instance, she did not say whether she would serve another term if asked. Instead, she replied “I absolutely intend to serve out my term. I’m very focused on trying to achieve our congressionally mandated objectives, and I really haven’t had to give further thought at this point to this question.” Neither Yellen specified when the Fed intended to start unwinding its balance sheet: “The exact timing of this I don’t think matters a great deal,” she explained.

The take-home message is that Yellen gave a semiannual testimony before the Congress. She did not sound as hawkish as many had anticipated. Investors relieved and the gold prices rose. However, the rebound may be temporary, as gold prices were yesterday also supported by the political uncertainty and the interest rate hike delivered by the Bank of Canada. Investors should not forget that the Fed appears to still be in a position to continue hiking rates.