Gold prices continue to be lifted by the market’s reaction to yesterday’s announcement by the Federal Reserve Open Market Committee (FOMC). The committee decided to hold interest rates at their current target range of 0.25% to 0.50% while also indicating that there will only be two—rather than four—quarter-point rate increases over the course of 2016.
Thursday Morning Action
During trading early on Thursday, spot gold rose about 0.3% to $1,266/oz. You may be seeing somewhat higher prices reported for gold, especially with Wednesday’s strong surge in the wake of the dovish FOMC decision. Keep in mind that this is the paper gold price, which spot generally trails behind (hence the designation of “gold futures”).
Although this forward action on the paper markets no doubt influences the movement of spot prices, which indicate what the physical metal is being sold for “on the spot” on the open market, the two prices are different. The importance lies in what gold is trading for at the moment versus what the traders in the futures market are expecting the yellow metal to do in April.
From a technical perspective, gold’s support is being seen at $1,264/oz and $1,258/oz, while resistance seems to be at the $1,270/oz and $1,275/oz levels. Meanwhile, silver moved 1.5% (or +23¢) to settle above $15.90/oz. Both platinum and palladium were over 1% higher, approaching $1,000/oz and $600/oz, respectively. The dollar was 1% lower to 94.9 on the DXY index.
Following the Fed
Over the past 15 months or so, it has been a repeated pattern in the gold market for decisions made by the Federal Reserve regarding monetary policy to drive the action more than any other single factor. While there is a case to be made that gold could perform just as well under an environment of rising interest rates, there is no question that gold shines even brighter as an asset when the Fed chooses to be cautious with its proposed rate hike schedule.
The reasoning behind this dynamic is straightforward: When interest rates are low, there’s less reason to switch out of a non-yield-bearing asset like gold for things like cash in a bank account, government bonds, and the like. (Obviously these vehicles for saving money don’t offer the same tangible advantages of gold, but a large proportion of investors are only concerned with the profits that their investments are producing in the very immediate term.) In fact, in countries where negative interest rate policy (NIRP) is the “new normal,” holding your money in gold makes more sense in the short-term as well as the long-term.
Moreover, central banks generally raise interest rates when the economy is “heating up,” and they’re worried that they need to put a damper on inflation. Because the Fed has decided not to hike rates and instead keep the path to normalization slow, the markets are getting the signal that the global economy isn’t doing particularly well. Not surprisingly, this caused stocks to reverse into the negative on the realization that the Fed is responding to economic conditions rather than the other way around.
Not surprisingly, both the Swiss National Bank (SNB) and the Bank of England (BOE) each stood pat on their own respective interest rates.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.