Gold prices suffer on likely US Fed rate hike

Anticipation of an interest rate hike by the US Federal Reserve put gold prices under pressure, correction to the tune of $40-50/ounce expected


On the domestic front, prices may fall by Rs800-1,000/10g if a rate hike happens. Photo: Priyanka Parashar/Mint
On the domestic front, prices may fall by Rs800-1,000/10g if a rate hike happens. Photo: Priyanka Parashar/Mint

Gold started 2017 on a mildly positive note—on a year-to-date basis, gold price on the Multi Commodity Exchange of India (MCX) has gained 4.84%, while globally, prices have increased 6.35%. But rising bets of an interest rate hike by the US Federal Reserve as early as next week and a strengthening dollar may halt the up move, at least in the near term.

A two-day Federal Open Market Committee (FOMC) meeting is scheduled on 14-15 March. According to CME’s Group FedWatch Tool, the market is working with an 84% probability of Fed moving on rates by 25 basis points at its coming meeting. This tool calculates the market’s views on the likely changes of the Fed’s policy rate at future FOMC meetings, based on CME Group’s 30-day Fed Funds Futures prices. A basis point is 0.01%.

Anticipation of a rate hike in March has already put gold prices under pressure and some commodity analysts expect correction to the tune of $40-50/ounce in global gold prices and on the domestic front, prices may fall by Rs800-1,000/10g if a rate hike happens. (One ounce equals 28g). Locally, gold demand is muted currently, but given the fetish Indians have for the metal, renewed buying in physical gold may be seen at lower levels, thus limiting downside in prices, they added. Currently, MCX gold is at Rs29,011/10g.

Despite this, gold bulls should not lose heart because the medium-term outlook is positive, thanks to a slew of global uncertainties looming large. There is lack of clarity and direction on US President Donald Trump’s polices; also, forthcoming elections in the European nations of France, Germany and the Netherlands raise questions about the future of the European Union, a key political risk. These factors would keep global equity markets on edge but work in favour of safe-haven gold.

Meanwhile, an important economic datapoint that the Fed considers to decide on interest rates is the US jobs report. The Bureau of Labor Statistics will release its non-farm payrolls data for February on 10March. In January, job creation in the US was better than estimated and this time around too, expectations are that the number would be strong. A strong jobs report would mean that the US economy is in a better position, thus giving the Fed more confidence to hike rates.

After three consecutive years of negative returns, gold ended 2016 with positive returns. International and MCX gold prices were up 8.6% and 11.35%, respectively. To conclude, with a Fed rate hike on the cards, gold’s sheen may fade for now, but as the aforementioned events unfold, market participants are likely to increasingly flock towards bullion to seek refuge from volatility.

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