The upcoming Federal Reserve Open Markets Committee (FOMC) meeting on 20 March, 2019 is expected to confirm market expectations that the Federal Reserve (Fed) will remain on hold for the rest of the year. This, in turn, will likely influence gold’s performance.
Our historical analysis shows that when the Fed has shifted from a tightening to a neutral stance, gold prices have increased, even if this effect has not always been immediate. In our view, the combination of rangebound US interest rates, a slowdown in the appreciation of the US dollar and continued market risks will continue to make gold attractive to investors, “ said a statement form World Gold Council (WGC).
Bond market participants are even pricing a small chance of a cut (15%) for the first time in several years. The 20 March 2019 FOMC statement, combined with the Fed’s economic projections report, will provide more clarity about their monetary policy expectations in 2019. This, in turn, will offer further guidance on gold’s likely performance in the coming months.
During 2018, the performance of gold was largely influenced by the direction of the US dollar, but interest rates, in conjunction with market uncertainty, have once again taken a front seat, says WGC.
While no clear evidence points to an immediate positive impact on the price of gold after the Fed pauses, historical analysis suggests that gold eventually reacts positively as the pause cycle extends and/or the Fed eases monetary policy. Historical post-tightening periods have shown an eventual strong gold performance, counterbalancing the performance of risk assets such as stocks or commodities, and complementing – sometimes even outperforming – assets such as Treasuries and corporate bonds.
Outside the US, the ECB surprised markets in recent months by extending its asset purchase programme; yet unlike US Treasuries, the bond markets in Europe and the UK are still pricing a positive, if small, chance of a rate hike this year. This, combined with continued uncertainty surrounding trade negotiations between China and the US, may likely slow down the appreciation of the US dollar.
If, indeed, the Fed were to signal a more dovish stance and the US dollar remains rangebound, this will likely remove some of the strong headwinds that gold faced in 2018.