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June Hike Is Coming. Will Gold Survive?

Commentaries & Views

The message from the recent FOMC minutes is clear: brace yourself for the interest rate hike next month. Should gold bulls be worried? Gold’s reaction shows that not necessarily. You will find more details in our today’s analysis.

June Hike Is Virtually a Foregone Conclusion

Yesterday, the U.S. central bank published minutes from the recent FOMC meeting. What are the take-home messages from them?

First of all, the Fed signaled its willingness to hike the federal funds rate by another 25 basis points in June. The hint was formulated as follows:

Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.

The message is clear. If the sky does not fall, we will raise interest rates once more. If you still have some doubts, there is another clue, although less explicit:

Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected.

Investors believed it The market odds of the June hike are 90 percent. So it is an almost certain move. If the Fed fails traders’ expectations, the markets will shake. The raise of interest rates is theoretically negative for the gold prices, but the move is practically already priced in them.

But Is the Fed Hawkish?

As always, the analysts discuss widely whether the recent Fed’s communication was dovish or hawkish. The market verdict is that the FOMC turned slightly dovish, as the odds of the Fed hike in June dropped from 100 percent one week ago to 90 percent after the release of the minutes.

Why slightly dovish? Well, the Fed officials were not convinced that the inflation will stay at or above the target for long. It hit 2 percent in March, increasing the confidence of the FOMC members “that inflation on a 12-month basis would continue to run near the Committee’s longer-run 2 percent symmetric objective”. Fair enough. Nevertheless:

it was noted that it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee’s 2 percent objective

It’s bad news for gold in the medium term. The yellow metal flourishes during the periods of high and accelerating inflation. But we are still far from such an environment. On the other hand, more cautious Fed is more gold-friendly. This is perhaps why the price of gold increased slightly after the release of the minutes, as one can see in the chart below. But it might also be the case that the U.S. central bank just needed an excuse to pause in May despite favorable macroeconomic conditions.

Chart 1: Gold prices (London P.M. Fix) from May 21 to May 23, 2018.

Implications for Gold

The recent Fed’s monetary policy statement did not bring good news for the gold market. The U.S. central bank telegraphed another interest rate hike. And it signaled its uncertainty about the inflationary outlook. Although the inflation has recently hit the Fed’s target, it is still uncertain whether it will remain at this level. So, the FOMC minutes were slightly dovish, but its paradoxically bad news for gold, as the Fed’s stance resulted from the lack of strong evidence for persistently high inflation. Inflation hedges, such as gold, cannot enjoy that rhetoric. Some analysts argue that the Fed was cautious, but, hey, what did they expect after just one reading of inflation at 2 percent after years of being below the target?

However, the minutes should not significantly alter the gold market, as they did not offer any revolutionary insights into the mindset of the FOMC members. They will continue gradual tightening of the monetary policy. And the June hike is already priced in gold prices. Stay tuned!

Thank you.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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