A UK perspective on US business and finance Nov 19, 2015
Gold Price: Why Did It Rise After Latest Rates Hint?
The latest dynamics driving the gold price could make the medium-term trend hard to predict
The narrative has been clear for some time: gold, along with other non-yielding commodities, will suffer when the Fed raises interest rates. Or will it?
Yesterday the Federal Reserve published the minutes of its rate-setting committee meeting in October, which were broadly seen as emphasizing that a rates rise is likely to take place in December. The gold price, surprisingly, rose.
It should be noted the rise was relatively minor – spot gold rose from around $1,064 an ounce before the announcement to $1,070. Gold was this morning trading at around $1,073 in London, a figure still close to its five-year lows and below the closing price before the brief 'safe haven' rally in the wake of last Friday's terror attacks in Paris.
But why did gold buck the downward trend? In part it was simply a function of a slight fall in the US dollar against which gold is often held as a hedge, Reuters notes. The greenback has been soaring of late and remains near multiyear highs, so a slight easing at some point was inevitable.
Perhaps the timing of the dollar dip was significant, however. The October commentary from the Fed and the subsequent barnstorming US jobs report together make a strong case for a rates rise. Yesterday's minutes appear more nuanced than that and contain some of the usual caution from dovish members. As a result, investor bets on a December rate rise actually fell slightly.
This could all suggest that a rates rise is now 'priced in' – and that therefore there is a good chance the gold price may have found a bottom whatever happens next month.
A decision to leave rates unchanged would be good for gold in that "having allowed markets to take firm hold of the belief that it would [raise] the Fed would lose all credibility", Peter Schiff of Euro Pacific Capital writes on CNBC.
"Investors would rightly conclude that the Fed was bluffing all along, and that we are stuck at zero for the foreseeable future. This would surely ignite a gold rally for the ages."
But Schiff adds that even a rise may not precipitate a longer-term fall, as " investors have been expecting a rate hike for quite some time" and have been "factoring in substantially more than 25 basis points" worth of increase. "In fact, we are likely to get language that suggests a 'one and done' reality… this could cause a 'buy the rumour sell the fact reaction' that sends gold up rather than down."
Of course, it is just as likely that the minutes told us nothing we did not already know. The hard reality of a rates increase – if indeed it comes – will still be a hurdle for the gold price. For that reason, more analysts than not are expecting it to fall back towards $1,000 if this happens.
Whether gold stays there for long, though, is another matter.
Gold price near six-year low – and outlook remains weak
The gold price dropped even further yesterday, tumbling to a near six-year low of $1,064 an ounce in Asian trading overnight, as a shift back into risk assets following the Paris attacks continued the yellow metal's downward slide.
US inflation data, which showed consumer prices returning to growth and rising by 0.2 per cent in the year to October, is another factor in gold's latest slump. The official figures were above analyst expectations, adding further weight to the argument that the Federal Reserve may decide to raise interest rates at its final meeting next month.
A rates rise is likely to hurt non-yielding commodities such as gold and to boost the dollar against which the metal is typically negatively correlated.
Gold was trading slightly higher this morning at $1,072 an ounce, although this figure is still below the five-year low it reached last Thursday. Minutes of the last Federal Reserve meeting due this afternoon may offer more clues on the near-term trend, but any repeat of the more hawkish tone detected in the Fed's October decision to leave rates unchanged will put further pressure on the price of gold.
Traders, meanwhile, see little chance of anything in the minutes, or elsewhere, providing support for a significant upward movement. In fact, a poll of investment bankers by the Wall Street Journal suggested the eventual increase in interest rates – whether it comes in December or next year – would hold gold at a lower price throughout next year.
Gold has averaged $1,156 so far this year and the ten bankers surveyed reckon it will average $1,114 next year. Given that they also expect a recovery in the final months of the year when further rate rises will have been thoroughly priced in, this could spark an initial 2016 move towards – or even below – $1,000 an ounce.
Gold price falls back as markets recover poise after Paris
Terrorist tragedies tend to rattle financial markets so it was no surprise that the markets opened lower yesterday in the wake of Friday's atrocities in Paris, with investors reacting to events by seeking safe havens to protect them from any fallout.
Gold, which is widely seen as a safe store of value in times of trouble, inevitably benefitted from this. BullionVault reports that the mid-morning London benchmarking auction saw the highest demand for gold since August, while Reuters notes that in the first ten minutes of trading in New York yesterday some 3,000 lots changed hands, ten times the average level over the past two months.
SEE RELATED Interest rates: five things we learnt from the Fed's latest minutes
Having risen to $1,084 an ounce in the immediate aftermath of news of the attacks in the French capital, gold rose to $1,098 in the Asian trading session yesterday. The price remained at around $1,090 an ounce through much of the day, well above the $1,073 floor it hit last Thursday.
But markets have recovered their equanimity following the swift response from the French government in the form of a spate of police raids and a promise to invest in defence. European equities closed yesterday mostly marginally back in the black – and are rallying strongly this morning. Gold is now heading lower.
The precious metal fell further in Asia overnight to below $1,084 an ounce and is now languishing at $1,080 this morning. If the risk-on move gathers pace it is possible that the five-year lows of late last week might return, with possible target prices of around $1,050 having previously been mooted.
Meanwhile speculation is mounting that there might be a US Federal Reserve rates increase this month for the first time in nearly a decade. A rise is likely to hurt gold relative to income yielding assets and the US dollar against which the precious metal is typically held as a hedge.
Gold price rises after Paris attack – but will rally last?
The gold price rose in afternoon trading in the US on Friday – and again in Asia overnight – as investors rushed to safe havens in the wake of the Paris terror attacks.
As markets digested the impact of the tragedy on the economy and tourism-related stocks in particular fell sharply, equity indices receded.
In contrast gold, which is traditionally used as a sanctuary in times of heightened risk, has rebounded from the near-six-year lows reached last week.
Having fallen as far as $1,073 an ounce at one point on Thursday, according to Investing.com, the gold price rallied to $1,091 in New York in late afternoon trading on Friday as news of the Paris atrocity broke.
In Asia overnight, in its first trading session since the scale of the attack has become clear, it at one point touched as high as $1,098 an ounce.
Whether gold will sustain these highs is questionable, however. It is quite likely that volatility will persist for a short time, but equities will most likely recover their poise before too long as the underlying fundamentals that have supported a prolonged risk rally come back into focus.
Then there is the continuing sense that a US interest rates rise is looming in December. Despite some underwhelming US retail sales data on Friday, this still remains a majority chance in the eyes of market investors – and it will hurt gold relative to income-generating assets, where returns will be significantly enhanced.
Gold has already softened and steadied back around $1,091 an ounce in Europe. This higher level could well persist in the coming days but will likely slip if economic data continues to support the case for a rates hike as we head towards next month's Fed meeting.