Gold Braces for Potential March Rate Hike

US interest rate hike anticipated on the Fed’s next meeting on March 14th -15th, 2017

Gold prices slipped on March 02nd, 2017, as the dollar firmed on hawkish comments from US Federal Reserve officials that stoked expectations of a US interest rate hike on the Fed’s next meeting on March 14th-15th, 2017. Spot gold fell 0.2% to $1,246.14 per ounce after rising a few days ago to $1,263.80, its highest since November 11th, 2016. US gold futures fell 0.3% to $1,246.60.

The dollar index, a measure of the greenback against a basket of six other major currencies, was up 0.1% at 101.910. On March 01st, 2017, it reached 101.97, the highest since January 11th, 2017. Higher US interest rates would diminish demand for non-interest bearing gold while a higher dollar makes gold more expensive for buyers using other currencies.

Earlier during the week, gold prices rose to their highest level in nearly three months, reflecting investors’ anxiety over a rapidly evolving global political landscape. In the last three instances of US interest-rate increases, gold prices have jumped in the months that followed. Gold is up about 7% since the Federal Reserve raised rates on December 14th, 2016. It jumped 13% in the two months following the last increase in December 2015 and 6% the previous time in June 2006.

On February 28th, 2017, San Francisco Fed President John Williams and New York Fed President William Dudley gave a hint about the central bank’s urgency to tighten. Williams said policy makers will give “serious consideration” to a rate boost on the Fed’s next meeting, adding that he does not see a need to delay the next move. Dudley said the case for tightening “has become a lot more compelling.” Economists and industry watchers see a 50-50 chance that the Fed boosts rates in March 2017, after previously ruling it out.

Fed Chairperson Janet Yellen told the US Senate Banking Committee on February 14th, 2017, that the Federal Reserve will likely need to raise interest rates at an upcoming meeting. Yellen said that delaying rate increases could leave the Fed’s policymaking committee behind the curve and eventually lead it to hike rates quickly, which she said could cause a recession. The Fed has also indicated that it expects to hike rates three more times in 2017, two or three in 2018, and three in 2019, as inflation expectations have increased considerably along with the strengthening of labor market conditions.

During early 2017, precious metals initially plunged as investors noted Trump’s pledge to revive economic growth with infrastructure spending. That would raise returns on assets such as shares and curb interest in havens like gold. Yet, with Trump’s time in office so far focused on other matters, the trend was quickly halted and reversed.

Investors in the largest exchange-traded fund backed by gold have bought more than 40 metric tons in February 2017, helping to boost prices 6.8% so far in 2017. There were seasonal gains in the run up to Lunar New Year in January 2017 when the Chinese typically purchase gold as gifts. Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.28% to 843.54 tons on March 01st, 2017, from 841.17 tons on February 28th, 2017. Spot silver fell 0.2% to $18.38 an ounce. Platinum was down 0.2% at $1,012.70, while palladium dropped 0.2% to $773.50 on March 01st, 2017.

In a related development to gold being viewed as a safe haven, Australian gold output hit a 17-year high of 298 tons in 2016 as higher bullion prices drove mining companies to dig deeper, according to Reuters on February 25th, 2017. A robust world gold price and favorable foreign exchange rates for most of the year that boosted prices for local producers were the factors behind the increase. Australia produced a record 314 tons of gold in 1997.

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