Gold price poised to rally next year as Fed rethinks rates

Taiwan (Dec 2)  Gold might be poised to rally as speculation mounts that the US Federal Reserve will hit the pause button on interest-rate hikes next year.

After lift-off in December 2015 followed by a rise a year later, the US central bank has since steadily raised benchmark rates and is widely expected to do so again this month.

However, the path after that is clouded after Fed Chairman Jerome Powell said on Wednesday that rates are “just below” estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments.

It was “getting pretty obvious that at some point Powell would have to flinch,” Trey Reik, senior money manager at the US unit of Sprott Inc, which oversees US$7.6 billion, said in an interview. “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”

While bullion was weighed down in the second and third quarters by a stronger US dollar and rising borrowing costs, the dynamic might now be shifting as doubts build over the Fed’s tightening path next year.

Beyond the immediate focus of this weekend’s G20 summit — which might roil markets — there are other drivers that favor further gains in bullion including a steady build-up in exchange-traded fund holdings as well as votes of confidence from top banks.

Goldman Sachs Group Inc recommends an outright long gold position into next year.

“If US growth slows down next year, as expected, gold would benefit from higher demand,” analysts, including Jeffrey Currie, said in a Monday note that endorsed bullion as one of its top 10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”
Gold futures settled at US$1,227.80 an ounce on Friday, capping the first back-to-back monthly gain since January.

However, they were down 0.1 percent for the week.

That uptick followed two consecutive quarters of declines through to September, with prices hitting a 19-month low in August.

So far this year, bullion is still down more than 6 percent.

On Wednesday, Powell offered few explicit clues on how many hikes would be necessary next year, but repeated his view that the Fed would have to be especially responsive to the data.

Minutes the next day, which covered the Fed’s last meeting, signaled that policymakers would adopt a more flexible approach next year.

Powell had earlier stirred a debate over tightening when he flagged potential headwinds to the economy amid a sell-off in equities and concerns over slowing global growth.

On Wednesday, he remained upbeat, forecasting continued solid growth in the US, inflation near the 2 percent target and low unemployment.

Any uptick in unemployment next year could see a pricing out of hike expectations, said Chris Weston, head of research at Pepperstone Group Ltd in Melbourne.

“If people get a sense that unemployment’s going up, heaven forbid, we’re going to see great volatility in 2019,” Weston said by telephone on Thursday. “That’s going to be a cue to sell the dollar and that’s going to be a cue to buy gold in much bigger size.”

Higher interest rates are seen to weigh on bullion, which does not bear interest.

However, in the two most recent US hiking cycles, gold has risen even as equities climbed, because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value, said Adrian Ash, research director at London-based BullionVault Ltd.


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