Gold Prices To Remain Under Pressure Despite Latest Fed Reprieve
Gold prices edged higher as the Federal Reserve decided to hold the target range for the benchmark federal funds rate steady at its latest Federal Open Markets Committee (FOMC) meeting. [1]
London PM Fix Gold Prices, Source: Kitco
The Federal Reserve is largely in wait-and-watch mode as the new White House administration sets its fiscal and economic agenda in motion. In addition, though inflation has firmed, driven by an increase in oil and gas prices, it still remains below the Fed’s 2% target, precluding a rate hike at the latest FOMC meeting. [2]
Though the Federal Reserve held rates steady, strengthening economic conditions in the U.S. and low levels of unemployment set the stage for rate hikes later in the year. President Trump’s plans for lowering corporate taxes and regulation should create conditions for an acceleration in U.S. economic growth. [3] In addition, the President’s massive $1 trillion infrastructure spending plan should provide further impetus to growth. [4] Accelerating economic growth should push the Personal Consumption Expenditures (PCE) price index closer to the Fed’s target of 2% from December’s reading of 1.6%, likely translating into interest rate hikes this year. [2]
In spite of the reprieve by the Fed this time around, given the upbeat U.S. economic outlook and chances of interest rate hikes later in the year, the safe-haven investment demand for gold is expected to remain subdued this year. As a result, we expect gold prices to on average be lower this year, as compared to last year, and rise at a modest rate going forward. This is reflected in our forecast for Silver Wheaton’s average realized gold price, as illustrated below.
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Notes:
- FOMC Statement, Federal Reserve Website [↩]
- U.S. Consumer Inflation Firmed, Spending Accelerated in December, Wall Street Journal [↩] [↩]
- Trump tells business leaders he wants to cut regulations by 75% or ‘maybe more,’ CNBC [↩]
- How Donald Trump blew up the bond market and changed everyone’s view of interest rates, CNBC [↩]