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Outlook for Gold Prices – Assessing the Variables

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Gold prices under pressure

There’s one factor that’s having a huge impact on gold price dynamics right now. It’s the expectation of a Fed rate hike. The Fed has a dual mandate of maximum employment and stable prices, or 2% PCE (personal consumption expenditure). Any factor that seems to contribute favorably to that mandate fuels a sell rally in gold and vice versa.

Interest rates have been near zero since 2008. An interest rate hike would be negative for an asset not yielding any income. It leads investors to better interest yielding asset classes such as equities and bonds.

A rate hike would be negative for gold prices (GLD) and gold stocks, including Goldcorp (GG), Yamana Gold (AUY), and Agnico Eagle Mines (AEM). AEM forms 5.0% of the VanEck Vectors Gold Miners ETF (GDX).

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As we’ve seen in the previous parts of this series, the US economy is still doing well, although its pace of growth is slowing in most areas. Lack of wage growth remains one of the important missing pieces of the improving US labor markets. Industrial activity is also slowing down. Any further slowdown could lead the Fed to defer the interest rate hike.

Keep a close watch

Investors should keep an eye on indicators that might lead to the Fed hiking interest rates sooner rather than later. This includes labor market indicators, inflation data, inflation expectations, and general economic indicators that show the health of the US economy and the sentiment of the country’s consumers.

Any slower-than-expected interest rate hike will be positive for gold.

 

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