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When Is Three Better for Gold Than Four?

Commodities / Gold and Silver 2018 Mar 22, 2018 - 04:13 PM GMT

By: Arkadiusz_Sieron

Commodities

His hand didn’t shake. Powell hiked interest rates at the first FOMC meeting with him as the Chair. But the key factor for the gold market is what he signaled about the future path of the federal funds rate. The crucial word is “three”, not “four”.

Another Meeting, Another Hike
In line with expectations, the FOMC acknowledged the improved economic outlook and raised interest rates again. The key paragraph of the recent monetary policy statement is as follows:


In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

It was the sixth hike during the current Fed’s tightening cycle, but the stance of monetary policy remains accommodative. The federal funds rate remains historically low and the pace of increases is gradual, as the chart below shows.

Chart 1: Effective federal funds rate (green line, left axis, in %, monthly) and the price of gold (yellow line, right axis, London P.M. Fix, in $) from 1968 to 2018.

As in the previous cases, the Fed also raised the interest rate paid on required and excess reserve balances from 1.50 to 1.75 percent and the primary credit rate from 2 percent to 2.25 percent. The vote was unanimous and already priced in the gold prices, so it shouldn’t affect the precious metals market.

Fed Steepens Path, but Forecasts Only Three Hikes in 2018
The March FOMC projections were much more interesting. The members of the Committee raised their forecasts of GDP growth in 2018 and 2019, signaling confidence in the U.S. economy in the short run. They also projected a lower unemployment rate and slightly higher inflation in 2019 and 2020.

And most importantly, the U.S. central bank lifted its expected median federal funds rate in 2019 from 2.7 to 2.9 percent. It implies three rate increases next year, compared with two moves seen in December. Similarly, the FOMC members revised their projection for 2020 from 3.1 to 3.4 percent. It means an additional hike that year. Therefore, the new FOMC turned out to be more hawkish, just as we had been warning investors for a long time (for example, in the December edition of the Market Overview). The more hawkish FOMC may be a headwind for the gold prices in the medium term.

However, the FOMC continued to project a total of three increases this year, just as we predicted on Tuesday. It’s a very important development, as many investors worried that Powell could signal four hikes in 2018. Now, as the Fed turned out to be more dovish than expected in that matter, the markets eased a bit. This is why three is better than four for gold investors. Indeed, as one can see in the chart below, the price of gold spiked yesterday after the Fed indicated that it will stay on course.

Chart 2: Gold prices over the last three days.

Implications for Gold
We believe that the recent FOMC meeting is generally bullish for gold. The U.S. central banks steepened the interest rate path in the 2019 and 2020, but they kept the projected number of hikes this year unchanged. So the investors’ concerns about four rate hikes this year were alleviated – and now gold has some room to move upward.

Please also note that higher dots in 2019 and 2020 are still consistent with a very gradual path of hikes (not more than three per year). And these changes were partially anticipated given the fiscal stimulus and the changed composition of the FOMC. In short, Powell didn’t send a radically new message, as some investors feared. It means that gold has nothing to worry from the new Fed Chair.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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