Precious Metals Weekly – Did the Fed alter our view?

by: Georgette Boele

150918-Precious-metals-weekly.pdf (207 KB)
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  • Financial turmoil puts FOMC on hold
  • Dovish Fed supports gold…
  • …however this decision has not altered our view: we remain negative on gold

 

Financial turmoil puts FOMC on hold

After two days of meetings, the Fed kept rates on hold. The FOMC statement showed that policymakers are concerned about recent global developments and the tightening of financial conditions and their impact on economic activity. However, the door was left open for a rate hike later this year. We expect a rate hike in December as global risks should ease and the US economy should continue to recover.

Dovish Fed supports gold

Markets were volatile following the decision, but overall outcomes were supportive for bonds and gold, but negative for the dollar, as markets scaled back rate hike expectations. Gold prices moved higher, while the US dollar and 10y US Treasury yields fell.  At the end of the session US equities gave up their gains and closed down for the day. Other precious metals also received support. However, the more cyclical precious metals such as palladium and platinum underperformed. Palladium prices are even back at the levels from before the announcement of the FOMC decision. This signals that concerns about the growth outlook dampened the impact of a lower US dollar on gold prices.

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Did the FOMC decision alter our views?

We are negative about gold mainly because we expect lower demand from investors. Investor demand is mainly driven by investor sentiment in financial markets, the direction in the US dollar and US interest rates, the strength of the global economy and the attractiveness of other investment assets.  We expect jewellery demand from India and China to increase, but this will unlikely compensate for lower investor demand.

Is yesterday’s FOMC meeting resulting in a change our view? In short “no”. Because the FOMC decision is not changing the overall picture that the Fed will start its tightening cycle this year or early next year. If the Fed eventually hikes in December, as we expect, then the US dollar and yields should move up. This will weigh on gold prices if overall investor sentiment remains constructive. Even though we stand firm on the direction in gold prices, yesterday’s Fed decision has decreased the likelihood of gold prices hitting USD 1,000 per ounce this year. The later the Fed starts hiking the more the weakness in gold prices will be shifted towards next year. As the Fed is highly data dependent, so are financial markets. Stronger US data should push gold prices lower again.

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