Gold price looks promising again as investors overestimate Fed
The gold price looks promising as the week draws to a close. Dollar bulls were left disappointed after the Federal Reserve’s interest rate hike, but did not increase their forecast of three hikes over the course of the year, leaving the small change in the interest rate underwhelming.
Reuters reported that the dollar index hit a fresh 5-week low of 100.160 on Friday. Spot gold was at $1,226.31 per ounce by 0739 GMT after hitting its highest since March 6 in the
previous session, while U.S. gold futures were little changed at $1,226.20.
Gold’s status as a safe haven took a knock after uncertainty in the Netherlands calmed, with a stable centre-right party now holding the most seats. The French election is due to be held on the 23rd April, which is when uneasy feelings and tensions will increase on the continent again.
Ross Norman, CEO at Sharps Pixley, told Marketwatch by email that there have consistently been double-digit percentage increases in gold prices after a rate hike.
This seems counter-intuitive, as the gold price usually has an inverse relationship with interest rates, and looks less attractive compared to interest-bearing assets. But investors who make ‘short bets’ on gold are forced to buy back the asset at higher prices in order to mitigate losses, as the alternatives end up not being as promising as gold.
Brien Lundin, editor of Gold Newsletter, explains: “When an upcoming Fed rate hike becomes highly anticipated, deep-pocketed speculators go long on the dollar and, conversely, short gold. When the rate hike actually happens, they close out these trades by selling the dollar and buying gold.”
Lundin went on to comment on the future of the Fed for 2017: “Inflationary pressures are rising, and the Fed will not dare get ahead of inflation in its gradual move toward higher rates,” he said. “This guarantees negative real rates for perhaps years to come, and similarly guarantees an extremely bullish environment for gold for some time.”
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