Expect a Rise in Gold’s Price on Fed’s Dovish Stance on Rate Hikes
Gold may be set up to rally as speculation mounts that the Fed will hit the pause button on interest rate hikes in Y 2019.
After lift-off in late Y 2015 followed by a rise a year later, the Fed has since steadily raised benchmark rates and is widely expected to do so again this month.
But the path after that is clouded after Chairman Powell said last Wednesday rates are “just below” estimates of the so-called Neutral, which markets took to mean a softer stance than previous comments.
Chairman Powell would have to flinched. Once you get to the consensus view that the Fed may be done, the USD will come under severe pressure. Gold will explode to the Northside.
Gold was weighed down in Quarters 2 and 3 by a stronger USD and rising borrowing costs, that dynamic may now be shifting as doubts build over the Fed’s tightening path in Y 2019. Drivers that favor further gains in gold include a steady build-up in ETF holdings as well as votes of confidence from top banks.
Goldman Sachs Group Inc. recommends an outright long gold position into next year. “If US growth slows down next year, as expected, gold would benefit from higher demand,” analysts said in a 26 November note that endorsed gold as one of its Top-10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”
Last week, futures capped the 1st back-to-back monthly gain since January 2018.
That uptick followed 2 Quarters of declines through to September, with prices hitting a 19-month low in August. YTD gold still down more than 5%, trading at about $1,236 oz Monday.
Higher rates weigh on gold, which does not bear interest.
Yet in the 2 most recent Fed hiking cycles, gold has risen even as equities climbed because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value.
During the previous tightening cycle from mid Y 2004 to 2006, when borrowing costs rose to 5.25%, gold surged more than 50%. Since December 2015, gold up about 15%.
Now, all eyes will now be on the FOMC’s final meet of this year on 18-19 December to get clues on what may happen.
After that policy meeting Fed policy makers may convey sufficient softening of future expectations.