Gold Prices Need More Negative Interest Talk To Rally Higher – CME EconomistBy Kitco News
Thursday February 18, 2016 15:40
(Kitco News) - The gold market is going to need another paradigm shift if it is going to see another rise similar to last week, which pushed prices to a one-year high, according one economist at CME Group.
In a report published Thursday, senior economist Erik Norland explained that gold’s parabolic run since hitting a multi-year low in December was the result of shifting expectations of Federal Reserve interest-rate hikes.
The market has never believed the Fed’s ambitious forecast to raise rates four times in 2016, said Norland. He added that even after the December rate decision, markets were only pricing at most two rate hikes.
However, since then, a rout in oil prices, a global market meltdown and disappointing growth forecasts have pushed rate-hike expectations to practically zero and gold has been the biggest beneficiary. But prices do not have much room for further growth.
“While the likelihood of a very slow pace of future Fed tightening is indeed good news for gold investors, the bad news is that the change in expectations that drove the rally may have largely run their course. Basically, there isn’t much of a rate-hike expectation left to de-price,” said Norland in his report.
For gold to shift higher, Norland argued that markets now have to start pricing in renewed easing from the Fed, even the possibility of introducing negative interest rates.
“Unless markets really come to expect that the Fed will reverse course and take back its recent rate hike, which seems unlikely, the gold rally is likely to lose a major source of support,” he said. “From our perspective, the Fed wouldn’t dream of taking back its recent rate hike unless there is a significant and sustained deterioration in the U.S. labor market, something that has not happened.”
Last week, Fed Chair Janet Yellen raised the idea of negative interest rates, during her testimony before Congress. Gold ended up rallying to a 12-month high at $1,263.90 an ounce after she said that negative rates was not a policy tool she would take off the table.
“In the highly unlikely scenario that the markets ever price in strong expectations of negative rates from the Fed, however, gold would be off to the races,” he said.
Thursday, April Comex gold futures settled the session at $1,226.40 an ounce, up $14.90 on the day. Fed fund futures are pricing in an 8% chance that the Fed raises rates at its March meeting. The highest probably for 2016 is a 33.6% chance that the central bank moves in December.