Why Has Gold Risen Despite An Increase in Interest Rates

by Trefis Team
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The U.S. Federal Reserve decided to increase the U.S. interest rate by 25 basis point on its latest Federal Open Market Committee (FOMC) meeting held on 12th and 13th December. This move was highly anticipated by the market and hence was being priced against gold well ahead of the meeting. However, despite the action being against the attractiveness of gold as an investment, gold prices have risen by 100 basis points on the closing on the market on December 13th.

Weakening of U.S. Dollar Due to Unchanged Future Projections of Interest Rate Hike has Supported Gold Prices

The U.S Dollar Index (DXY) measures the value of the dollar against a basket of six major foreign currencies. The index fell roughly by .6% during the Fed’s announcement on the 13th, which was otherwise gaining momentum ahead of the meeting. Although, an interest rate hike should have ideally strengthened the position of the dollar, the Fed’s decision negatively impacted the currency as the meeting kept its projection for interest rate hikes for 2018 unchanged. This was despite the fact that the Fed sees a consistent recovery in the U.S. economy in the upcoming year. The Fed expects 3 additional rate increase in 2018 and another 2 in 2019, in line with its September projections. However, GDP growth expectation was increased by .4% higher than its previous estimate of 2.1%, mainly due to the impact of the implementation of the U.S. tax reform. [1]

(Source:Market Watch)

Since strengthening of the dollar makes dollar denominated gold a cheaper means of investment, the fall in the dollar, in turn, strengthened the price of gold.

Limited Upside For Strengthening of Gold Prices

The U.S dollar, however, will strengthen going forward especially with the implementation of the U.S. tax reform. This would remain as a persistent disadvantage for gold in the future years and we expect gold to fall gradually going forward over our forecast period, as illustrated by the below chart.

You can view our base case for gold price forecast here and create different scenarios using our interactive platform.

This would remain as a setback for major gold producers like Newmont Mining and Barrick Gold who are already struggling in an environment of volatile gold prices.

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. Fed raises interest rates, keeps 2018 policy outlook unchanged, Reuters []
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