Geopolitics ‘Often Trump’ Monetary Policy When It Comes To Gold - Capital Economics
(Kitco News) - More often than not, the effects of tighter monetary policy on gold are overrated, with drivers like geopolitics able to erase any impact of a rate hike, Capital Economics said in a report.
“Tighter monetary policy in developed markets is likely to put some downward pressure on commodity prices, especially gold. But even with gold, other factors, such as geopolitical risks, can often trump the impact of monetary policy,” Thomas Pugh, commodities economist at Capital Economics, wrote in his latest Commodity Update published on Wednesday.
Another important point that is tied to global monetary policy and gold is that central banks around the world will not need to raise rates very far because of the “reduction in equilibrium interest rates over the past decade,” the report noted.
“As a result, the impact on commodity prices of monetary policy tightening should be outweighed by fundamental demand and supply factors,” Pugh highlighted.
In the next few years, the market will see central banks raising rates from “ultra-low or even negative levels” and withdraw some of the liquidity that was “pumped into markets over the last few years.”
The downside is that commodities, in general, will feel a downward pressure because higher interest rates mean higher opportunity cost of holding assets like precious metals.
But, the reason for raising interests rates — "improved economy” — will always be good for commodities demand, according to Pugh.
On Thursday, gold largely continued to hold onto its recent gains and traded close to its key psychological level of $1,300. December Comex gold was last at $1,289.50, down 0.21% on the day, while spot gold on Kitco.com was at $1,289.60.