In Depth

Gold price waits for rates clues from Jackson Hole

Political turmoil in the US has the potential to 'help gold in the short and longer term'

Gold price drops sharply on rates hike bet

1 March

"To be honest, Bill Dudley has knocked [Donald] Trump out of the financial market headlines today," Ray Attrill, of National Australia Bank, told the Financial Times.

Dudley, president of the New York Federal Bank and a voting member of the Federal Reserve's rate-setting committee, made those headlines after saying the case for increasing interest rates had become "a lot more compelling", says the paper.

His hawkish intervention followed fellow voting-panel member Robert Kaplan, president of the Dallas Fed, saying the US may need to raise interest rates "sooner rather than later".

Taken together with consistently strong economic data, the comments now have investors believing rates could rise as soon as next month.

Market bets put the implied chance of a March increase at 80 per cent, up from 36 per cent a week ago, says the FT.

As a result, the gold price slipped from a high of $1,257 an ounce overnight to a low of $1,241 this morning. It had been as high as $1,265 an ounce it London trading yesterday.

Rising rates are bad for gold, as it does not offer an income yield and so loses ground to other asset classes.

Added to that, the so-called "Trump trade" is back for the dollar and equity markets, both of which tend to rise when investors are feeling bullish, at the expense of "safe haven" gold.

This followed the US President's address to Congress yesterday, in which he struck a "very optimistic tone", says Mark Heppenstall of Penn Mutual Asset Management.

Although investors were initially disappointed at the lack of detail on Trump's plans to cut taxes and increase spending, the S&P 500, the US benchmark equity index, is now expected to open at another new record high this afternoon.

Gold price surges above $1,250 after Fed minutes

24 February

The gold price was on an upward march this morning, reaching its highest level in three-and-a-half months.

Spot gold was trading at $1,256 an ounce, up around $20 from its level for much of this week after the release of minutes from the latest Federal Reserve meeting, which are keenly watched for signs the central bank may be increasing interest rates.

Rates hawks at first were not disappointed: the minutes noted "many" policymakers felt they should be ready to raise short-term interest rates again "fairly soon", says the Financial Times.

But there was also a strong focus on "uncertainty regarding the impact of possible tax cuts and other White House economic policies".

There had been speculation that rates could go up as soon as next month, but the market is not expecting an increase before June.

Investors are also only pricing in two rates rises this year, rather than the three the Fed has forecast.

Gold tends to react negatively to interest rates increases because they increase the opportunity cost of holding non-yielding assets such as gold. They also tend to boost the dollar, against which gold is held as a hedge.

Of particular concern for analysts are Trump's tax plans. "Treasury Secretary Steven Mnuchin on Thursday laid out an ambitious schedule to enact tax relief for the middle class and businesses by August," says Reuters. That would be welcomed by most investors as supportive for growth.

But, adds the news agency, "[Mnuchin] said the Trump administration was still studying a proposed new border tax on imports", which it is feared would be negative for trade and growth.            

Elections in France, the Netherlands and Germany this year, which could see a further rise in populism, are also causing concern, boosting demand for gold, says Reuters, as it is arguably the world's default "safe haven" investment.

Gold price holding up in face of 'Trump trade'

15 February

Markets are in the grip of another "Trump trade", says The Independent.

Recent actions from the new US President suggest he will follow through on campaign pledges to lower taxes and boost spending. He has even hinted at dismantling banking laws introduced following the financial crisis.

While many on the political left rage at what they see as a package that explicitly benefits big corporations, traders are displaying an exuberance suggesting they believe the moves will be positive for growth.

US stock markets have reached a succession of record closes, including a new all-time high of 2,337 for the S&P 500 last night, says the Financial Times.

Meanwhile, the dollar is also doing well, touching near its highest level in a month overnight and remaining within touching distance of December's 14-year peak.

A big rise in risk assets, coupled with continuing strength of the global benchmark reserve currency against which it is held as a hedge, should spell bad news for noted "safe haven" gold.

There is also the prospect of rising interest rates to deal with and yesterday Federal Reserve chairwoman Janet Yellen sounded an unexpectedly hawkish tone by saying it would be "unwise" to wait too long before increasing them again.

Gold did slip back on the triple-whammy of bearish indicators, falling 0.2 per cent to $1,225 an ounce, says Reuters.

However, that is a reasonably muted reaction and trading is holding in a range north of the $1,220 it has been around for the past couple of weeks.

The gold price is also up around six per cent for the year as a whole so far.

This resilience reflects the other side of the Trump coin: political uncertainty that is keeping markets on edge. 

Nor is this confined to the US, says Reuters. Elections in France and Germany, which could provide a platform for more populist policies, are "supporting safe-haven appetite".

Gold price falls $20 after Trump trails 'phenomenal' tax plans

10 February

The gold price took a sharp turn lower on Thursday, hours after hitting its highest level in three months.

Spot gold reached $1,245 an ounce in early morning trading, but fell back to $1,223 in New York trading later in the afternoon.                   

It had steadied this morning at a little above $1,226 an ounce.

Gold's about-face was "almost entirely due to the surge in the dollar that took place after President [Donald] Trump revealed he had a 'phenomenal' tax plan ready for unveiling," INTL FCStone analyst Edward Meir told Reuters.

The US President had told a meeting of airline executives his administration was "way ahead of schedule" on tax reforms and that he would announce something "over the next two or three weeks that will be phenomenal in terms of tax and developing our aviation infrastructure".

The White House said he plans to announce the "most ambitious tax reform plan since the Reagan era… sending stock prices and the dollar higher on hopes for a cut in corporate tax rates".

Gold tends to react poorly to rises in the dollar, against which it is held as a hedge. Rising stocks also indicate "risk-on" trading that does not favour "safe haven" assets such as gold.

However, Meir told Reuters "investors were enamoured more by Trump's general announcement and have not yet bothered to focus on the fine print" or the lack of detail. As such, the "sell-off in gold could be somewhat premature and could reverse course".

In addition, ongoing speculation that rate-setters are much more hawkish this year, as economic data shows continued improvements, is also weighing on gold.

Recently market bets relaxed to suggest only two increases in interest rates are priced in for this year.

However, Chicago Federal Reserve president Charles Evans told Reuters it is "reasonable to expect the Fed to raise rates three times this year".  

Gold tends to fall when rates are rising, as this increases the opportunity cost of holding the non-yielding metal.

Gold price hits three-month on political tensions

9 February

The gold price hit a new three-month high above $1,245 an ounce overnight after continuing its general upward trend yesterday.

Gains have been paired slightly this morning to $1,241, buy this still "means that, so far this year, the precious metal has gained more than eight per cent", says Bullion Vault.

This latest rise came despite a slight rise for the dollar yesterday. Gold is usually negatively correlated to the greenback as it is held as a hedge against the benchmark global reserve currency.

Overall, though, the dollar has dipped so far in 2017, down close to two per cent.                         

Wednesday's swing for gold is a result of ongoing "geopolitical uncertainty", which is boosting its safe-haven appeal, says Bullion Vault.

The site highlights the upcoming European elections and the high poll ratings for far-right leader Marine Le Pen in the French presidential race, which could presage a "Frexit" from the European single currency, or even the EU altogether.              

In addition, US President Donald Trump has rattled markets with his protectionist policies and the so-called "Muslim ban". He has also repeatedly said the dollar is overvalued.

All of this has convinced traders that the economy will suffer and that interest rates, currently projected to increase three times this year, will be held lower.                                                                                                         

"The priced-in projection for the year-end level of the benchmark Fed Funds rate fell to the lowest in two months," says Daily FX, despite policymakers sounding a consistently hawkish tone.

It adds that gold's slight dip this morning reflects "resistance" around the $1,240 an ounce level. If the price closed above this level, says the site, it could go on to breach $1,255. However, it also has the potential to fall back below $1,230.


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