Fed Rate Hike Dampens Gold Prices

by Trefis Team
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Last week’s rate hike by the Federal Reserve negatively impacted gold prices in the days leading up to and post the announcement on June 14, as illustrated by the chart shown below.

Gold Prices June 2017

London Fix Gold Prices, Source: Kitco

The Fed cited strengthening household spending and business fixed investment amid steady jobs growth as reasons for last week’s rate hike, in order to facilitate employment growth while maintaining price stability. [1] Moreover, the Fed is expected to raise rates by an additional 25 basis points over the remainder of the year. [2]

Gold is largely viewed as a safe-haven asset from an investment point of view, with investments in the yellow metal generally made in order to hedge against macroeconomic or geopolitical uncertainty. While uncertainty surrounding geopolitical tensions in the Middle East and elections in Europe have kept prices elevated for a significant part of the year, steady economic growth in the U.S. and a rally in the stock markets have acted as dampeners on the prices of the metal. The potential enactment of President Trump’s legislative agenda, particularly the planned $1 trillion overhaul of U.S. infrastructure and the lowering of corporate taxes, has driven a rally in U.S. stock markets. If implemented, these measures would boost expectations of U.S. economic growth going forward, driving investors away from gold. However, the passage of both of these items through Congress will be challenging in the prevailing polarized U.S. political landscape. The potential enactment of the President’s legislative agenda and an additional rate hike by the Fed is likely to keep gold prices in check in the coming months. However, the lack of certainty regarding legislative progress in Washington should prevent prices from declining considerably. The following chart illustrates our forecast for gold prices, with prices expected to average marginally lower this year as compared to the last one.

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:

  1. FOMC Statement, Federal Reserve Press Release []
  2. The Fed’s New Dot Plot, Bloomberg []
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