Commodities & Metals

With Federal Reserve Expected to Be on Hold, Positive Trends for Gold in 2019

This week will bring yet another Federal Reserve Open Markets Committee (FOMC) decision on interest rates. The current expectation is for Fed Chair Jerome Powell and the FOMC to keep the federal funds rate steady with the current 2.25% to 2.50% range. The biggest issue of course will be how the Fed’s outlook for additional rate hikes has been diminished for 2019. This, along with additional outside interest rate pressures, could be a further supportive action for the price of gold for the remainder of 2019.

The FedWatch tool shows the March decision has a 98.7% chance that fed funds rate will be held steady. That same tool, as of March 19, shows that the fed funds range will also be the same 2.25% to 2.50% by the end of July with an 86.5% probability. Even the December 2019 FOMC meeting is now handicapped at a 74.5% chance of being at the 2.25% to 2.50% range.

According to the World Gold Council, a steady fed funds rate likely will have a significant influence on gold’s performance after better than a 9% rally in the fourth-quarter of 2018 (when stocks were cratering).

The Federal Reserve is not the only driving force when it comes to interest rates and the impact on gold. Also acting as a boost to gold was the recent announcement by the European Central Bank that it would continue with its asset purchase program and that rates would have to be kept lower for longer than it previously had hoped. The European Central Bank had indicated on many occasions in 2018 that it was on pace to end its quantitative easing. Another supportive action for gold has been the continued uncertainty surrounding the timing and implications of Brexit.

The World Gold Council’s investment update on gold said:

Our historical analysis shows that when the Fed has shifted from a tightening to a neutral stance, gold prices have increased, even if this effect has not always been immediate. In our view, the combination of rangebound U.S. interest rates, a slowdown in the appreciation of the US dollar and continued market risks will continue to make gold attractive to investors… During 2018, the performance of gold was largely influenced by the direction of the US dollar, but interest rates, in conjunction with market uncertainty, have once again taken a front seat.

There are additional drivers for gold prices in 2019 as well. The World Gold Council sees economic expansion as supportive for jewelry, technology and long-term savings.

While the council noted that the immediate effects of interest rate policy transition are not that clear, the average intermediate term tends to be positive. Tuesday’s report pointed out that gold rose 3.6% in 2001 (12 months after the Fed stopped raising rates). In 2007, gold rose by 7% only one month after the transition and was 19% higher 12 months after the Fed’s last hike.

Gold bugs should always keep in mind that historical references may have other issues behind the support for gold beyond interest rates. Late in 2001, the slowing economy was dealt a further blow by the September 11 terrorist attacks, and the 2007 to 2008 period was leading into the Great Recession.

On last look, gold was up just 1.5% year to date, compared with a gain in the S&P 500 of closer to 13%. The yield on the 10-year Treasury note was last seen at almost 2.63%, after having been at 2.75% on March 1 and about 2.68% at the close of 2018.

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