News Bureau

Monetary policy impact on gold

According to the World Gold Council (WGC), the upcoming Federal Reserve Open Markets Committee (FOMC) meeting on 20 March is expected to confirm market expectations that the Federal Reserve (Fed) will remain on hold for the rest of the year. This, in turn, will likely influence gold’s performance.

In the context WGC said, “Our historical analysis shows that when the Fed has shifted from a tightening to a neutral stance, gold prices have increased, even if this effect has not always been immediate. In our view, the combination of range bound US interest rates, a slowdown in the appreciation of the US dollar and continued market risks will continue to make gold attractive to investors.”

In our 2019 Outlook we cited “monetary policy and the direction of the US dollar” as a key trend to watch this year. As it stands, current bond prices, which are reflecting market views based on interim cues from the Fed since the last FOMC meeting of 19 December 2018, are signalling that the Fed will most likely keep rates unchanged for the rest of the year.

Bond market participants are even pricing a small chance of a cut (15%) for the first time in several years. The 20 March FOMC statement, combined with the Fed’s economic projections report, will provide more clarity about their monetary policy expectations in 2019. This, in turn, will offer further guidance on gold’s likely performance in the coming months.

Drivers of gold fall into four categories and the interactions between these categories determine gold’s short- and long-term performance. During 2018, the performance of gold was largely influenced by the direction of the US dollar, but interest rates, in conjunction with market uncertainty, have once again taken a front seat.

Why is this? Our previous research highlighted the fact that interest rates have greater impact on asset price performance (including gold) when there is a shift in policy stance (e.g. from neutral to tightening or vice versa) and our analysis of gold’s performance in January suggests that, indeed, expectations of interest rates are starting to play a more influential role than they did in 2018.

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