Gold and the Fed interest rate decision fallout

The initial reaction to the Fed’s first interest rate rise in nine years has been marginally positive for gold. Only time will tell if, on reflection by the market, its initial post-hike performance can be maintained, or improved upon.  It has already come down a little this morning trading in the mid to high $1060s after mid $1070s immediately post the announcement.  This fall from the initial reaction is very much in line with the strength of the US dollar which has continued to rise as the markets take in the rate increase.  Don’t be surprised if gold falls further as the day progresses.

The Fed will be encouraged by the initial reaction to the 25 basis point increase in rates. Equities have moved positively initially – even in areas of the world which have to be concerned about the effects of dollar interest rate rises on their own economies.  Whether this pattern will continue remains to be seen.  If domestic and overseas equities markets are not adversely affected by the interest rates rises and the strengthening dollar, then that will encourage the Fed to continue to raise rates, sooner rather than later.

Commentators and analysts remain mixed in their views, but perhaps overall more bearish than bullish with plenty still looking for $1000 gold or lower.  China probably remains the key player here so do look at my recent article on – Goode insights on China goldwhich offers some views on how China considers gold and why it may well not allow the price to fall any more.  It certainly has the wherewithal to manipulate the gold price should it so wish, either by direct intervention in the gold market utilising only a fraction of its massive foreign reserves, or even just through overt policy statements from senior politicians.

As for our own view on what is likely to happen.  In its statement the Fed was looking for perhaps three or four further small interest rate rises this year to around 1.375% and a similar number next with an overall 3.25% rate target representing ‘normalization’ by end 2018 and maybe higher beyond that.  But any delay in this program implementation – and given its record on interest rate rise prevarications over the past couple of years one would perhaps be surprised if this program can be adhered to, particularly given the Fed’s own record on missing predicted targets, could be gold positive.

But the overall problem with this scenario for gold is that the price will perhaps still fluctuate on the likelihood or not of the Fed keeping to its proposed rates rise program.  If the dollar continues to rise that could be another negative for gold, although here again the Fed will want to somehow control a dollar surge given its potentially negative impact on the U.S. economy. But with China signalling it will allow the yuan to float lower, and weaknesses in other emerging economies a dollar increase may be difficult to control.  Perhaps significantly though when the dollar index rose above 100 it was quickly brought back down (one suspects through Fed behind the scenes manipulation) but is now trending upwards again.

Some of the pro-gold analysts have been predicting something of a normalization in the gold market post the initial Fed increase, which had become inevitable possibly for all the wrong reasons because not to have increased rates would have sent some very disturbing signals to the markets.  However we are not convinced by this argument.  The price will likely still be very dependent on the Fed interest rate program and whether it will, or will not, be implemented as planned.  fundamentals still look good, though, and the wild card here may be shortage of physical supply as available inventories in London and New York are run down and sales out of the ETFs continue to diminish in the face of ever continuing strong demand from Asia, the Middle East and Russia.