Fed holding steady on rates may boost gold performance — report
Wednesday’s Federal Reserve Open Markets Committee (FOMC) meeting confirmed market expectations that the Federal Reserve will remain on hold for the rest of the year. This decision could have significant implications on the gold market, according to analysts at the World Gold Council (WGC).
Monetary policy dictates gold price
Historically, monetary policy has been a key catalyst for changes in gold price. “When the Fed has shifted from a tightening to a neutral stance, gold prices have increased, even if this effect has not always been immediate,” WGC analysts note. Interest rates have become more influential relative to the value of US dollar, which is another deciding factor in gold performance.
This is especially true when the FOMC changes its policy stance because the market expectations will also adjust, and more uncertainties will emerge. In this case, holding rates steady instead of keep tightening (rate hikes) could have a positive effect on gold performance, albeit not for the short term. Effects after a transition in policy are not felt immediately due to several reasons: uncertainty over when hiking may resume, investors shifting toward safe fixed income assets, and uncertainties over currency and inflation.
However, reports from the World Gold Council indicate that “gold does perform better in a post tightening cycle.” Gold investors may need to be patient as the period over which this occurs does vary. For instance, gold rose by 3.6% in 2001, 12 months after the Fed put a hold on interest rates, but rose by 7% in 2007 only one month after policy change.
Global risks give reasons to buy gold
A more dovish stance by the Fed, coupled with the ongoing trade talks between the US and China, could also contribute to a slowdown in US dollar appreciation, which could add to gold’s momentum. Elsewhere, the European Central Bank’s extended asset purchase program, as well as uncertainties surrounding Brexit, have provided additional risks in the global financial market. This may be good news for investors looking at gold for diversification and liquidity in a more turbulent market environment, the WGC reports.