Metals Rally as Gold Reacts to the Fed Announcement on Interest Rates
Gold Reacted to the Fed Announcement on Interest Rates with Rally
On Wednesday, gold reacted to the Fed announcement with a rally that broke over the $1220 mark by Friday. Janet Yellen announced – in a rather positive communiqué – that rates would go up a quarter point, and that we could anticipate a couple more hikes this year.
It may seem counter-intuitive that gold went up after a rate hike announcement. However gold reacted to the Fed Announcement with a “buy the fact” move. Generally, higher interest rates means lower gold (and other commodities) as interest-bearing assets become more attractive. For example, last week, gold moved lower in anticipation of an announcement on an interest rate hike. But inflationary pressures and underlying implications in Yellen’s more dove-ish language proved to be favorable to gold and silver.
What this means for investors: Yellen had a dearth of positive economic indicators to call on when arguing for the rate hike, but there are also significant factors countering them.. Employment numbers are better, the stock market is hitting highs, and inflation is on track to rise. However, investors expected a more hawkish tone on GDP growth. The lack of significant signs of economic growth acceleration was underlying the announcement. Furthermore, as inflationary pressures rise (as expected), gold will get even more of a boost. Silver also got a boost this week for the same reasons and factors as gold.
Dollar Strength Down after Rate Hike
While gold reacted to the Fed announcement with a rally, the dollar did the opposite. The dollar was at a five-week low on Thursday while bond yields rose. Analysts are projecting the dollar strength to come off even more by mid-year. Investors are watching the G20 finance minister meeting taking place this week for further indications on how currencies are going to move.
What this means for investors: Many investors (as well as President Trump) have been saying for some time now that the dollar is too strong. It resilience the past few months have been holding back gold prices, which usually correlate inversely to it. If inflation creeps higher and the dollar’s strength ebbs, expect precious metals to see a lift.
President Trump Releases Budget Blueprint As U.S. Hits Debt Ceiling
On Thursday, the U.S. debt limit was restored after being suspended. This sets a legal limit on how much the U.S. can borrow. Astoundingly, there was barely a mention of it from the mainstream media.
The national debt is over $19 trillion. Lawmakers will have to raise the debt ceiling by sometime this autumn to avoid defaulting on essential payments to service this debt. Already it is shaping up to be a vicious, partisan political battle. Speaker Paul Ryan guessed that it won’t be a “clean debt ceiling hike” and Secretary Treasury Steve Mnuchin stated that it will require “extraordinary measures.”
President Trump’s budget blueprint made bigger headlines. The proposed blueprint made some significant – and controversial – cuts, but also added a $54 billion defense spending increase. The plan also did not cover the 70% portion of the budget that is non-discretionary spending.
What this means for investors: The past couple Gold Market Discussions have spent some time on this looming issue of the potential debt ceiling crisis. It seems unlikely that spending is going to get cut back in an impactful enough way to prevent rocketing inflation, despite the President’s proposed cuts. First of all, he will have a tough political battle to even pass some of these. Secondly, the proposed increases will likely exceed the cuts. Finally, with a deficit already over $19 trillion, nothing short of drastic measures will chip away at this balance. As some of these inevitabilities come closer to being realized, investors will start choosing gold for larger parts of their portfolios for its long-term protection value.
By Royal Assent, Article 50 for Brexit Can Now Be Officially Triggered
Queen Elizabeth gave royal assent this week to the Brexit bill. This means that Prime Minister Theresa May can now officially begin negotiations with the European Union to leave the economic union. The House of Lords attempted to pass an amendment that would prolong the process to trigger Article 50 of the Lisbon Treaty, but the Queen’s assent nixed it. It is expected that May will begin the process sometime after March 29th.
In other news out of Europe this week, right wing populist Geert Wilders lost the Dutch Prime Minister election, but his party gained parliamentary seats. The Netherlands and Turkey also traded diplomatic jibes and rhetoric over the Dutch forbade a Turkish minister from campaigning among the many immigrants living there for a Turkish referendum that would expand presidential power.
What this means for investors: There are high levels of uncertainty coming out of Europe right now. It is important for investors to bear in mind that events in the European markets significantly impact precious metals as well. Some of these uncertainty factors were also responsible this week for gold’s rally. Furthermore, as uncertainty increases, safe haven demand will continue to rise.
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Here are some articles from the web discussing the topics in this week’s post:
Gold Reacted to the Fed Announcement on Interest Rates with Rally
Dollar Strength Down after Rate Hike
President Trump Releases Budget Blueprint As U.S. Hits Debt Ceiling
By Royal Assent, Article 50 for Brexit Can Now Be Officially Triggered
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.
