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Fed Rate Hike and Outlook Priced into Gold Prices: More Upside?

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Fed raises rates for the first time in 2018

In its first meeting under new chief Jerome Powell, the US Federal Reserve increased interest rates by a quarter of a point. This rise is the sixth time that the committee has raised rates since it started on the monetary tightening path in December 2015. It’s forecasting at least two more hikes in 2018. Markets widely expected the rate hike. The guidance seems to be slightly less hawkish than expected.

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Powell: Positive on the US economy

New Fed Chairman Jerome Powell believes the US economic outlook has strengthened in recent months. The Fed upgraded the economic forecast for 2018 GDP from 2.5% in December 2017 to 2.7%. It also increased expectations for 2019 from 2.1% to 2.4%. The pace of economic growth is vital to the committee’s future tightening path. The Fed kept its inflation expectations steady at 1.9% for 2018 but slightly increased the core PCE (personal consumption expenditure) forecast from 2.0% to 2.1%.

While the Fed assessed the economy as strong, it still didn’t hint at a fourth rate hike. Gold had been under pressure due to that eventuality. The US dollar fell after the Fed’s rate decision.

Rate hikes and gold

Gold, on the other hand, rallied 1.7% to $1,334 per ounce after the decision, mainly on the dollar’s weakness. While a rate hike could erode gold’s appeal as an investment option, three hikes have already been priced into gold prices. Moreover, if the Fed marches on a tighter monetary path in case of higher inflation, inflation could encourage investment in gold as an inflation hedge. Higher-than-expected rate hikes would be detrimental to gold’s appeal.

In such a scenario, gold stocks (GDX)(NUGT) such as New Gold (NGD), Agnico Eagle Mines (AEM), Sibanye Gold (SBGL), and IAMGOLD (IAG) could also fall. Year-to-date (or YTD), these stocks fell 24.3%, 13.2%, 22.8%, and 11.5%, respectively.

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