Gold price reacts on Fed rate hike anticipation

GOLD slipped from US$1,350 in September to range between US$1,270 to US$1,290.

On Tuesday, gold rebounded ahead of the release of the September Fed meeting minutes.

However, it has yet to break its strong resistance at US$1,300.

Later in the week, the US inflation data gave a boost to gold prices, landing above the US$1,300 level on Friday. The Fed began its current round of rate hikes in 2015, and the Fed’s target rate now set at 1.25 per cent, up from zero per cent two years ago.

Throughout 2017, the Fed has raised the rates twice, by 25bps on March 15 and June 14 respectively. On September 2017, the Federal Reserve left interest rates unchanged, and announced will begin to reduce its huge portfolio.

Historically, gold was sold down by market participants before the announcement of a rate hike. Right after an increase in interest rate, gold rebounded, supported by a decline in the dollar.

The release of Fed Meeting minutes on Wednesday gave emphasis on the current low inflawith tion level, Fed’s target of an annual two per cent inflation before further interest rate hikes.

Concerns and debates has been expressed by policymakers on whether the economy is healthy enough for another rate hike.

On Friday, consumer prices recorded its biggest increase in eight months in September as gasoline prices stayed stagnant due to disruptions caused by the recent hurricane which affected oil refineries in the US.

Additionally, the recent employment report showed that the US jobs fell 33,000, the first time in seven years. It was claimed that this decline was caused by hurricanes Harvey and Irma, resulting in a delay in hiring.

Nevertheless, many policymakers still felt that another rate increase this year “was likely to be warranted”, the Fed said.

A higher rate could boost the dollar, which is inversely related to gold prices.

Theoretically, a higher rate makes gold investment less attractive to investors as there are more opportunities in other yielding investments.

This also tend to boost the dollar, making gold more expensive for holders of other currencies.

Market participants will continue to look at the Fed’s interest rates decision for the upcoming FOMC meeting on November 1 and on December 13.

Taking the recent hurricanes as a short-term damage to the US economy, investors are now forecasting an 82.9 per cent chance of a rake hike at the Fed’s December meeting, according to the CME Group’s FedWatch tool.