How Has Gold Been Behaving Ahead Of December FOMC Meeting?

by Trefis Team
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Gold prices have tumbled in the past week ahead of the Fed Open Market Committee (FOMC) meeting to be held on 12th and 13th of December. The fall in gold prices depicts the market anticipation of the negative impact of the interest rate hike ahead of the Fed’s meeting coupled with the increase probability of implementation of the U.S. tax reform.

Let us look at the key indicators which would influence the Fed’s decision next week.

U.S. Unemployment Rate

The U.S unemployment rate has not been a major concern for the Fed as unemployment has displayed a stable trend of decline in 2017. The latest data released by the U.S. Bureau of Labor Statistics reported the unemployment rate at 4.1% for October, a 15% Y-O-Y decline. The fall in the unemployment rate is a key indicator for improvement in the U.S. economy. However, the pressing concern for the country still remains the inflation rate, which has not significantly improved with declining levels of unemployment. The inflation rate has been consistently below the Fed’s target rate of 2%, which has been a basis for the Fed’s decision on the interest rate hike throughout 2017.

U.S. Inflation Rate

A stagnant MoM (Month-on-Month) core inflation rate at 1.7% restrained the Fed from increasing the interest rate in September. However, the inflation rate for October has improved by .1%, the highest in 6 months and hence might be taken as an indicator for the economic recovery in the U.S.  Although the core inflation rate is still .2% below the Fed’s target rate, 76% of Fed officials expect an interest rate hike in December as per the expectation revealed by the Fed Dot Plot. [1]

You can view our base case for the U.S. inflation and unemployment rate here and create different scenarios using our interactive platform

(Source: U.S. Bureau of Labor Statistics)

Thus, given the positive economic indicators of the U.S. economy, an increase in interest rates is almost certain in December. However, an increase in the key policy rate should not have a significant impact on gold prices as most of the volatility would already be priced in the yellow metal ahead of the FOMC meeting, though the Fed’s insight regarding its trajectory of rate hikes in 2018 might be a significant factor in deciding the course of  gold prices in the upcoming year.

Have more questions about Newmont Mining and Barrick Gold? See the links below.

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 Newmont Mining and Barrick Gold.

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Notes:
  1. The Fed’s New Dot Plot, Bloomberg []
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