The price of gold is largely linked to the state of the US economy. Major trends in the past can be connected to economic policies implemented in the US, and the recent trends are no different. Over the past 3-4 months, we can see this effect in action by looking at the chart on price of gold below:
How the price of gold responds to interest rates historically
Every time the FOMC made the decision to keep interest rates unchanged, the price of gold increased drastically. In the chart above, you can see that the price of gold remained above the 200-day SMA for most of 2016 until the election of Donald Trump which caused the price of gold to break below it.
A further drop in value came when the FED increased interest rates from 0.50% to 0.75%, strengthening the dollar and weakening gold. Several economic crises in the world starting with the economic slowdown in China at the beginning of 2016 and the Brexit vote on the 23rd of July kept gold prices up due to the increased demand.
The drop in price of gold on the final quarter of 2017 started due to increased speculation of the FED raising interest rates. Price of gold kept dropping after the US general elections as US stocks were soaring. Following this drop, the price of gold started to recover in 2017 after there was a series of less than favourable news about the US economy. In addition, the FED’s decisions to keep the interest rates at 0.75% also contributed to this rise in value.
Latest interest rate decision impact
The latest news from the FED, on the 15th of March, had an opposite effect from what most traders were expecting. The FED increased interest rates by 25 basis points, causing a rise from 0.75% to 1%. Instead of the typical strengthening of the US dollar, causing the subsequent drop in gold prices, that follows a rate hike, the dollar became weaker and gold stronger.
Experts from some of the largest investment banks such as Goldman Sachs have stated that this ‘unusual’ effect can be attributed to the dovish outlook showed by the FOMC. In the speech given by Janet Yellen, she stated that the coming interest hikes, of which there would be two more, would be ‘gradual’. Furthermore, she stated that the FED was aiming at a target of 1.4%, which was below what the markets were expecting. The US economy seems stable enough, with unemployment dropping and inflation still holding within the normal range.
Prior to the announcement by the FED to raise interest rates, other experts had predicted that the markets had already priced in the FED interest rate hike. Which would explain the market’s reaction to such dovish sentiments echoed by the FED chair. At the time of this writing, the price of gold is hovering above $1,200 per ounce which is more than a 2% increase from the price of gold before the FOMC statement.
Economists now believe the FED’s actions may cause the US economy to grow less strongly than the projected 2.1% growth. If the country is unable to sustain the expected growth, or if there is a market correction to the soaring US stocks and indices, the price of gold may very likely rise even higher through the year.