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Fed's Policy U-Turn Good For Long-Term Gold Prices - WGC

Kitco News

(Kitco News) - Gold investors disappointed with the yellow metals price action following last week’s Federal Reserve monetary policy meeting need to be a little more patient, according to the World
Gold Council (WGC).

John Reade, WGC chief market strategist, said that investors should look past gold’s short-term volatility and focus on its long-term potential. He explained that a recent report from the council shows that Fed’s abrupt shift in monetary policy should push gold prices higher within the next 12 months.

The latest WGC research looked at gold’s price action during the end of the last two Federal Reserve rate hike cycles. The research showed that in the first month after the U.S. central bank stopped hiking rates in 2001 gold prices fell 0.6%, within three months prices were down 3.4%, but within 12 months gold prices were up 3.6%. When the Federal Reserve stopped raising rates in 2007, gold prices were up 7% in the first month, but up nearly 20% 12 months later.

“I think the point is that investors should look beyond the next 30 days and the next $30,” he said. “Long term, a neutral stance from the Fed has been positive for gold and I don’t see any reason that would be different this time.”

Reade added that one reason the latest Fed decision is good for gold is just the magnitude of the shift in monetary policy. Last week, the U.S. central bank said that it does not expect to raise interest rates at all this year, down from an expected two rate hikes forecasted back in December. At the same time, the Federal Reserve downgraded its growth forecast for 2019 and said that it is looking to end its balance sheet reduction plan by September.

Despite the dovish shift from the Fed, the U.S. dollar has remained fairly resilient, currently trading near a two-week high. The U.S. Dollar Index last traded at 97.23 an ounce, up 0.28% on the day. Meanwhile, gold prices have dropped below $1,300 an ounce; June gold futures last trading at $1,296.30 an ounce, down 1.50% on the day.

Reade said that although external factors, growing economic weakness in Europe, and volatility in emerging markets is supporting the U.S. dollar, it is difficult to see it going much higher following the Federal Reserve’s moves last week.

He added that a slowdown in the U.S. economy should ultimately weigh on the U.S. dollar and equity markets, prompting investors to look for safe-haven alternative assets like gold.

“If you think about how far equity markets have come over the last 10 years, the length of this recovery, it makes me think that gold is an absolute and relatively good asset to be looking at right now,” he said. “It’s been a good 10 years and nobody should be surprised that analysts and economists are looking for an end to this recovery.

“If you are concerned growth is slowing and are looking at the price of equities maybe you should be looking at an allocation to gold because it does do well in a downturn,” he added.

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