Gold rose to a seven-month high
Gold prices (GLD) rose ~1.4% to a seven-month high on January 25. Gold prices briefly breached the psychologically important $1,300 per ounce mark. Gold (IAU) outperformed the S&P 500 (SPY) and the Dow Jones Industrial Average Index (DIA), which gained 0.85% and 0.78%, respectively, on January 25. The main driver behind gold’s strength is the weakness in the US dollar (UUP) (USDU) ahead of the Fed’s meeting. The Fed is scheduled to start its two-day policy meeting on January 29.
Gold gains on lower interest rates
The market widely expects the Fed to keep the interest rates unchanged. Gold benefits from lower interest rates because it reduces the opportunity cost of holding gold, which doesn’t yield anything in terms of income. As the Fed slows down on rate hikes (TLT), the relative strength of the US dollar could also wane, which would be another positive for gold.
Fed’s rate hike path
The Fed has already raised the rates four times in 2018. The Fed signaled two more hikes in 2019 during its December meeting. After the market sell-off due to the Fed’s hawkish outlook and weaker economic reports, Fed Chair Jerome Powell mentioned at the beginning of January that the Fed could be more patient with rate hikes (TLT). His comments calmed down the markets somewhat. While the markets (IVV) are now discounting a zero to one rate hike in 2019, the Fed’s course of rate hikes could change with the economic data.
The Fed’s tone from the meeting could be another driver for gold and other assets. Markets might rise due to an indication of an end to the Fed’s balance sheet reduction program.
Read Why Gold’s Long-Term Outlook Is Upbeat despite Short-Term Headwinds for more on gold’s price outlook in 2019.