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Gold is Back to Winning Ways as Fed Urges Caution

Gold is Back to Winning Ways as Fed Urges Caution

It was obvious at the start of this week that U.S. Federal Reserve Policy statement and Bank of Japan (BOJ) economic policies will be the major factors influencing gold prices. When the markets opened for trading on Monday, the gold trade was slow and quiet as investors started waiting to know if the Fed would raise interest rates and if the BOJ will succumb to pressures to weaken the Japanese Yen.

However, by Tuesday Gold started to see some mild bullish moves because the general market opinions tend to agree that the Fed won’t raise interest rates. In Wednesday trade, gold trade continued to enjoy the bullish tailwinds as oil prices rose on sentiment while gold prices climbed on speculation. Yesterday, gold ended the session with 0.6% gains at a one week high of $1,250.40 an ounce.

Gold finds strength on cautious fed policy statement

This morning, the bullish rally in gold seems to have been revived and the yellow metal is on the northbound move once more in European markets. Spot gold was up 0.7% to $1,254.96 an ounce as at 1155 GMT in London – Gold futures for June delivery gained $6.70 to $1,257.10 an ounce. The main reason behind the rally in gold is that the Fed has struck out the possibility of raising interest rates in April (as expected) in its policy statement.

The fed noted that interest rates would remain unchanged from current levels and the fed said it would be slow to raise interest rate this year. There were indications that the Fed would raise interest rate in the first quarter of the year because the Fed has teased about four quarter-point rate hikes. Later, the Fed slowed down to two- quarter point rate hikes – realistically the first rate hike will possibly be in June and second one towards the end of the year.

Low interest rates are good for gold because a low-interest rate environment makes the yellow metal more attractive over other low-risk assets. Analysts at HSBC note that “the longer the Fed holds off on raising rates, the better for gold… The bullion market will now focus on the prospects of a Fed hike at the next meeting in June, and the possibility that the Fed will tighten later this year may help cap bullion prices.”

Where is gold headed next?

The Fed is adopting a wait-and-see stance towards interest rates and the Bank of Japan went against all market expectations. The BOJ left rates at -0.1% against the market expectation that the interest rates will go deeper into negative territory. More so, the BOJ voted 8-1 in favor of maintaining the pledge to increase the monetary base. The moves by the BOJ will make it hard for the USD to strengthen against the dollar and a weak dollar often provides gold with bullish tailwinds.

Nico Pantelis, head of research at Secular Investor notes that “Even though gold is volatile in the short term, we don’t expect a snap of the new cyclical uptrend in gold… Gold will remain bullish, although more volatile. We still look at the $1,280 resistance level as an important ‘battlefield’ on the gold chart.”

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