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Why the Fed Could Make Gold Shine Next Year

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Dec. 31 2018, Updated 4:45 p.m. ET

The Fed’s tightening weighed on gold

A major factor weighing on gold prices this year was the Fed’s tightening cycle. Since the Fed started the current rate hike (BND) cycle in December 2015, it has hiked rates nine times, with the latest hike in December. Gold struggles to compete with interest-bearing securities, as it doesn’t offer periodic income.

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The tide is turning

However, the Fed seems dovish on hikes in 2019. When it raised rates by 25 basis points in December and signaled two more hikes in 2019, its tone was more hawkish than expected. Markets then panicked, prompting some Fed members to (SPY) (IVV) say it could reconsider its views on rate hikes next year. Moreover, US labor markets have stayed strong and a downside seems more likely than an upside, except maybe in wage growth. If inflation (TIP) remains under control in 2019, the Fed is not expected to move much.

Dovish stance expected

The Fed’s rate hikes could invert the yield curve in the near-to-medium term. The Fed has maintained that its future decisions will depend on market data. However, the yield curve’s flattening and inversion could reduce the chance of rate hikes (TLT).

A slower-than-expected rise in rates—either due to slowing growth or other geopolitical concerns—could benefit gold (GLD) (IAU). To learn more, read Why a Fed Policy Mistake Is Worrying Markets.

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