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Market Voice: Fed in reverse propels gold price upward

Johann Wiebe
Johann Wiebe
Lead Metals Analyst

As expected, for the first time in 10 years, The Federal Reserve (Fed) reversed course on its monetary policy by reducing interest rates by 0.25% to 2-2.25% at its FOMC meeting at the end of July. The decline was implemented in order to counter trade wars, low inflation and global economic weakness. After some volatile moves, the gold price continued its upward trend, also supported by President Trump’s recent trade tariff announcement. A strong, bullish sentiment on COMEX could halt the price progression short term, which, in our view, would merely be a hiccup in the upward trajectory for the rest of the year.


  1. Following the recent, but persistent, pressure President Trump has placed on the Fed to reduce interest rates, during the meeting held on July 31st, the Fed finally caved in and reduced its benchmark rate by 0.25% to 2-2.25%.
  2. Lower rates will likely push the U.S. dollar further down and reduce bond yields, which in turn, due to their strong negative relationship, so far, have had a positive effect on gold prices.
  3. Gold has many factors weighing in its favour at the moment, and as such we would not be surprised to see highs of $1,550/oz being tested this year.

Following the recent, but persistent, pressure President Trump has placed on the Fed to reduce interest rates, during the meeting held on July 31st, the Fed finally caved in and reduced its benchmark rate by 0.25% to 2-2.25%. The monetary normalisation efforts of the Fed in the form of unwinding part of its bloated balance sheet, loaded with treasuries and mortgage backed securities, will also be halted.

Chart 1: U.S. Central Bank Policy

A Datastream graph from Refinitiv highlighting the U.S. Central Bank Policy
Source: Refinitiv, Datastream

President Trump may be content with the move by the Fed, but he did not take the foot off the gas, indicating he was disappointed in the Fed for not wanting to support a prolonged rate reducing cycle. His reasons are clear, following the announcement of an additional 10% tariff hike on $300 bn worth of goods from China. If that comes to pass, the U.S. domestic market will face additional headwinds absorbing the extra costs. A further easing of monetary policy would be a welcome development.

The Fed stated they are “mindful of the risks of the outlook and are prepared to move with the tools needed” in order to sustain a near ten-year expansion. It looks as if policies implemented by President Trump’s administration in regard to the trade war with China has had significant impact on economic progress. Manufacturing activity slowed to a 10-year low in early July with production volumes and purchases falling, holding back the economy and posing a threat to the longest expansion in history.

So what about the gold price?

The monetary policy reset, from an extended period of contracting monetary policy towards a  period of expanding monetary policy, has had major implications on various asset classes, such as equities, bonds and precious metals, also sometimes termed as “the bubble of everything”. That hegemony seems to have run its course, as following the Fed announcement, equity markets, such as the S&P 500 [.SPX], have made quite a correction, also weighed down by another possible tariff hike. And so has the U.S. dollar. On the other hand, gold has benefitted.

Chart 2: SP, 10 Year Bond, USD and Gold Priced USD

Refinitiv Eikon graph showing SP, 10 Year Bond, USD and Gold Priced USD
Source: Refinitiv, Eikon

Gold’s lack of versatility in end uses is compensated by maintaining intricate relationships with other various asset classes, such as bonds, the U.S. dollar and speculative COMEX positions. Lower rates will likely push the U.S. dollar further down and reduce bond yields, which in turn, due to their strong negative relationship, so far have had a positive effect on gold.

It’s all about perception

There are plenty of arguments in favour of higher gold prices, but in the end it is all about perception. As can be read in our recently published GFMS Gold Survey H1 Update 2019, sentiment is usually determined not so much on the physical market but on COMEX, which highly leverages speculative managed money positions sharing an incredibly strong correlation (0.9) with gold.

Chart 3: Gold Managed Money Positions on COMEX

A Refinitiv Eikon - Datastream graph displaying Gold Managed Money Positions on COMEX
Source: Refinitiv, Eikon; Datastream

Net managed money positions surged in H1 2019 by adding massive gross long positions and cutting gross shorts. Further indications as to where the price will go based on speculative positions are clear. Following the physical market in H1 2019, it is very likely speculators will take some profits off the table and close out some longs and add to shorts. That will likely move gold down somewhat in the interim, however this would merely be a hiccup in the upward trajectory in our view.

The argument for gold rising remains sound, just as fiat money is increasingly lacking status as a sound store of value or a vehicle of steady purchasing power. With increasingly more liquidity in the system, gold does justify a higher price. Retailers and investors alike will also want to hold more of it as a portfolio diversifier or a hedge against future inflation spiraling out of control. Central banks, particularly in the East and Far East, have been keen buyers too.

As the Fed will reverse its course this year, the gold price will continue to benefit from that. Gold has many factors weighing in its favor at the moment, and as such we would not be surprised to see highs of $1,550/oz being tested this year.

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