What the US Federal reserve decides about interest rates impacts the price of gold, according to a new analysis by experts.
The World Gold Council, the trade body for businesses mining, trading and retailing gold, says the decision the Fed’s open markets committee makes when the members meet on March 20 will set the market for gold for the rest of the year.
The council’s analysis shows when the Fed shifts to a neutral stance, the price of gold generally goes up, even if the effect has taken time to seep through to the markets.
The upcoming Fed meeting is important because a report laying out monetary policy is on the agenda.
The council’s experts say the signs are the Fed will keep interest rates on hold for the rest of 2019, and even has the chance of cutting rates for the first time in several years.
Drivers that set price of gold
They say four drivers set the price of gold:
- Economic expansion that support consumers buying jewellery, investing and increasing sales for technology firms using gold in their devices
- Risk and uncertainty – either political or economic – promoting demand for gold as a financial haven
- Opportunity costs – for instance, margins created by changing values of currencies, especially the US dollar
- Momentum – including capital flows, positioning and price trends that can fire or dampen gold prices
“The first two are generally linked to strategic decisions to invest in gold, while the last two are more closely linked to tactical adjustments,” says the council.
Gold outperforms the rest
The report goes on to explain that a historical analysis shows gold performs better when monetary policy is eased.
“Based on the most recent cycles, our analysis indicates that gold does perform better in a post-tightening cycle, but the period over which this occurs varies. For example, gold rose 3.6% in 2001; 12 months after the Fed stopped raising rates. But it rose 7% only one month after the transition in 2007, a trend that continued as it was 19% higher 12 months after the Fed’s last hike.,” said the report.
“Gold generally outperformed stocks and the broad commodities complex during these same periods. It also outperformed US government and corporate bonds in the more recent post-tightening cycle – coinciding with the 2008-2009 financial crisis – and this was most likely as a result of more widespread systemic risks.”
