After two days of meetings regarding monetary policy, the US Federal Reserve officially announced the second interest rate hike of the year on Wednesday (June 13).
The Fed lifted the target federal funds rate by 25 basis points from 1.75 percent to 2 percent, but the increase had little impact on the price of gold, which remained just below the psychological barrier of US$1,300 per ounce.
Brien Lundin, president and CEO of Jefferson Financial, told the Investing News Network, “[g]old showed little response, so far, to the Fed’s rate hike, but the story remains to be written.”
“As investors who track the various gold-oriented websites and Twitter feeds know well, many analysts have been noting how gold has traded lower in advance of Fed rate hikes, only to rally strongly afterward,” he added.
Lundin, as well as other analysts and market watchers, have been tracking the phenomenon of the yellow metal surging after a Fed hike announcement since late 2015, but he now fears it may have a reversal effect, stating, “this dynamic is so well known and widely expected, it will stop working as traders compensate for the effect.”
Lundin also notes that there could be a secondary thing happening with the precious metal in relation to the Fed hike.
He stated, “[a]nother possibility: It could “stop working” now, only to start working later.”
Adding, “many of those who’ve begun touting this trading pattern are careful to note that it’s only failed to work one time, and that was after last year’s June rate hike. However, in that instance the effect was simply delayed — gold began to rally about two weeks after the June 2017 rate increase.”
Lundin points out that if we see gold follow the same pattern that it did in June 2017, where it posted around 10-percent gains during its delayed rally, then the yellow metal has the potential to go “well over the key US$1,400 mark.”
In addition to today’s interest rate hike, the markets are also reacting to the Federal Reserve’s guidance regarding future interest rates. The median average of the central bank’s updated forecasts were up from March’s projection of 2.1 percent to sit at around 2.4 percent.
The forecast also suggested that the Federal Reserve would raise interest rates two more times in 2018.
Interest rates are expected to increase to 3.1 percent next year, up from the previous estimate of 2.9 percent. By the year 2020, the Fed expects interest rates to climb to 3.4 percent.
Rounding out the Federal Reserve’s meeting come the knowledge that they expect the US gross domestic product to grow by 2.8 percent in 2018, with economic activity projected to expand 2.4 percent in 2019.
Overall, the economy is expected to grow 2.0 percent in 2020.
Neils Christensen of Kitco News stated, “[n]egative for gold though is that the central bank also forecasts tame inflation pressures throughout year. With higher interest rates, this means that real interest rates will push higher.”
Adding, “[t]he projections show inflation rising 2.1 percent for the next three years. Inflation expectations are slightly higher this year compared to March’s forecast of 1.9 percent.”
As of 3:27 p.m. EST, gold was up 0.26 percent, trading at US$1,298.60 per ounce.
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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.
From:: Investing News Network