Spot gold headed for the biggest gain in three weeks after Federal Reserve officials stuck with a projection for three interest-rate increases in the coming year, easing concerns that speeding up economic growth would spur an even faster pace of monetary tightening.
Gold prices rose on Wednesday, extending gains to 1 per cent as the dollar fell after the US Federal Reserve raised interest rates as expected but left its outlook unchanged for coming years.
The spot gold price rallied to US$1,256.87 after the Fed raised its benchmark interest rates by 25 basis points, or a quarter of a percentage point.
Gold prices on Friday held onto gains made after this week’s interest rate rise by the U.S. Federal Reserve and were set for their first weekly rise in four weeks.
The U.S. Federal Reserve decided to increase the U.S. interest rate by 25 basis point on its latest Federal Open Market Committee (FOMC) meeting held on 12th and 13th December.
By a 7-2 vote, the Fed on Wednesday raised the benchmark lending rate by a quarter percentage point, its third hike this year. In a statement following a two-day meeting, the Federal Open Market Committee omitted prior language saying it expected the labor market would strengthen further.
This move was highly anticipated by the market and hence was being priced against gold well ahead of the meeting. However, despite the action being against the attractiveness of gold as an investment, gold prices closed on a higher note on December 13th.
Generally, a rate hike pulls down gold prices. But contradictory situation was witnessed on Wednesday, where gold prices remained high even after a rate hike.
“Gold moved up in its initial reaction because Fed is dovish in terms of a rate hike vision for 2018, and it sees only three rate hikes, not four.
This vision weakened the US dollar which gave the required push to gold prices.
The U.S Dollar Index (DXY) measures the value of the dollar against a basket of six major foreign currencies. The index fell roughly by .6% during the Fed's announcement on the 13th, which was otherwise gaining momentum ahead of the meeting. Although, an interest rate hike should have ideally strengthened the position of the dollar, the Fed's decision negatively impacted the currency as the meeting kept its projection for interest rate hikes for 2018 unchanged.
This was despite the fact that the Fed sees a consistent recovery in the U.S. economy in the upcoming year. The Fed expects 3 additional rate increases in 2018 and another 2 in 2019, in line with its September projections. However, GDP growth expectation was increased by .4% higher than its previous estimate of 2.1%, mainly due to the impact of the implementation of the U.S. tax reform
GOLD BARS rose above 1-week highs against most major currencies in London trade Friday, extending their recovery from this week's multi-month lows as world stock markets slipped for a second day from new all-time highs.
The dollar was on the defensive on Friday after wrangling over a bill to change the US tax code dented confidence, while the euro sagged after the European Central Bank signaled it would maintain stimulus for as long as needed
As the Fed and ECB reverse sharply from their unprecedented easing of recent years to unprecedented tightening in the coming years, these record-high, euphoric, bubble-valued stock markets are in serious trouble. As they roll over and sell off, investors will rush to prudently diversify their stock-heavy portfolios with counter-moving gold. There’s nothing more bullish for gold investment demand than weakening stocks.
So contrary to recent weeks’ and months’ erroneous view that Fed rate hikes are bearish for gold, history proves just the opposite is true. Gold has thrived in the 11 modern Fed-rate-hike cycles before todays, and it has powered higher on balance in this 12th one. While you wouldn’t know it after this past year’s extreme Trumphoria rally, Fed rate hikes are actually bearish for stocks and thus quite bullish for gold.
