Lack of Clear Signal on Rate Hike Is Positive for Gold



The FOMC meeting

The FOMC (Federal Open Market Committee) is the rate-setting group of the Federal Reserve. It meets eight times a year in scheduled meetings to decide on monetary policy for the United States. The FOMC last met on June 16–17 to reassess the economic situation and lay out US monetary policy.

At that meeting, the FOMC reaffirmed its target range for the federal funds rate. The rate will remain between 0% and 0.25%. The following conditions that need to be met for a liftoff stayed the same:

  • further improvement in the labor market
  • a reasonable level of confidence that inflation will move back to the desired 2% over the medium term

Article continues below advertisement

The FOMC’s post-meeting statement said, “Even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” As a result, it’s imperative that investors keep a watchful eye on economic indicator releases in the United States and elsewhere for important cues about monetary policy decisions.

The rate hike

As the above graph shows, inflation continues to run below the Fed’s target. The FOMC stated, “Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports.” However, energy prices have stabilized since the second quarter of this year.

The Fed’s statement was more or less unchanged from its statement in April. The Fed stuck to its resolution not to provide any hints on the timing of its eagerly anticipated rate hike.

Investment impact on gold

As we’ve already seen, increasing interest rates negatively impact non-income–earning assets like gold. The lack of a clear path on a rate hike is a positive for gold prices (GLD) and gold stocks, including Goldcorp (GG), Sibanye Gold (SBGL), Iamgold (IAG), and Harmony Gold Mining (HMY). The same is true for ETFs that invest in these stocks, including the VanEck Vectors Gold Miners ETF (GDX). Goldcorp and Harmony Gold Mining form 7.5% and 1%, respectively, of GDX’s holdings.

In the rest of this series, we’ll look at some of the economic factors that affect the direction of the rate hike and eventually gold prices. In the next article, we’ll see how concerns of a “Grexit,” or a Greek withdrawal from the European Union, is impacting gold prices.


More From Market Realist