The Fed’s September meeting
The Federal Open Market Committee or FOMC is due to meet on September 19–20, 2017, and gold investors will be monitoring this meeting closely for the tone of the Fed, which will be instrumental in deciding the future timing, size, and frequency of coming interest rate hikes in the US.
Remember, higher interest rates make interest-yielding investments attractive to the detriment of gold, which doesn’t provide yields in terms of regular income.
The likelihood of a rate hike
The chance of an interest rate hike at the September FOMC meeting is nearly zero, given the string of weak inflation numbers we’ve seen lately and other considerations, such as the damage done by Hurricanes Harvey and Irma. The latest pick-up in inflation, as we saw in the previous part of this series, could be one of the catalysts for a rate hike in Fed’s December meeting.
As of September 15, 2017, the market is factoring in a ~50% chance of a rate hike in December, according to CME FedWatch, compared with the 31% chance on September 7.
Another factor to watch out for in the September FOMC meeting will be any announcement regarding the normalization of the Fed’s balance sheet. The Fed mentioned in its July meeting that it expects to start a balance sheet normalization program relatively soon. Notably, the coming Fed balance sheet unwinding is already mostly priced into asset prices.
The Fed’s rate hike and gold
The Fed had forecast three rate hikes in 2017, of which two have already been completed. The Fed’s tone and commentary at the September meeting will likely set a tone for future rate hikes, and so investors will be watching the job market and inflation data closely for further clues.
Although higher interest rates are negative for gold’s investment appeal, hikes during weakening economic conditions can be conducive for gold price growth. This scenario could benefit gold stocks (GDX) such as Hecla Mining (HL), Yamana Gold (AUY), AngloGold Ashanti (AU), and First Majestic Silver (AG).