Gold and the Fed

After dropping for seven consecutive weeks following Donald Trump’s election, gold started staging a relief rally at the end of December as the dollar consolidated, bond yields took a breather and the equity markets ebbed and flowed. Add to that some bargain-hunting as well as support from traditional buying in China ahead of Lunar New Year.

We strongly believe that it is the US economy and the Fed’s resulting approach to monetary tightening that will be the main factors affecting gold prices in 2017. The Fed adopted a more hawkish tone at the last FOMC meeting (13-14 December) and the “dots” (the fed funds rate projections by Fed governors) have been revised up. The Fed is now likely to raise rates more aggressively than previously foreseen, with three rises now expected in 2017. If those hikes all materialise, it will definitely be detrimental to gold prices. And they might well do so as the US economy (in light of the strong macro data released recently) seems quite solid, supported by a robust labour market which some even qualify as near full employment. Furthermore, Donald Trump’s promised fiscal stimulus (such as tax cuts and infrastructure spending) will most likely reflate this already strong US economy.

The recently released minutes of the FOMC meeting have shown, however, that “participants agreed that it was too early to know what changes in these [fiscal] policies would be implemented and how such changes might affect the economic outlook”. The minutes thus revealed that there remain uncertainties and differing views within the Fed, which have prompted a sharp US dollar correction to the benefit of gold prices. Yet we doubt that gold will continue to trade higher as we still believe the time for higher interest rates has now come. And those rate hikes are all the more likely as a change of guard is coming up at the Fed, with more hawkish voting members (Patrick Harker of Philadelphia, Robert S. Kaplan of Dallas and Neel Kashkari of Minneapolis) taking office soon.

We are maintaining our prudent view on gold, believing that it will probably remain range-bound, oscillating between USD 1100-1200. However, we are not ruling out the possibility that bullion could get a boost from a variety of factors in the coming months, such as effective Brexit, the elections in France, Germany, and the Netherlands, and Trump’s presidency. Right now the markets are bahaving as if all Trump’s election promises will become reality, but gold will definitely benefit if Trump’s presidency disappoints and he turns out to be unable to turn all his plans into action.

Névine Pollini – Senior equity analyst – Union Bancaire Privée (UBP)