As Fed rethinks rates, gold may rally in 2019

GOLDMAN RECOMMENDS AN OUTRIGHT LONG GOLD POSITION

Gold may be poised to rally, as speculation mounts that the US Federal Reserve will hit the pause button on interest rate hikes in 2019.

After lift-off in December 2015 followed by a rise a year later, the central bank has since steadily raised benchmark rates and is widely expected to do so again in December. But the path after that is clouded after Chairman Jerome Powell said on Wednesday rates are “just below” estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments.

It was “getting pretty obvious that at some point Powell would have to flinch,” Trey Reik, senior money manager at the US unit of Sprott Inc., which oversees $7.6 billion (Dh27.9 billion) said in an interview. “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”

Shift in dynamics

While bullion was weighed down in the second and third quarters by a stronger dollar and rising borrowing costs, the dynamic may now be shifting as doubts build over the Fed’s tightening path in 2019.

Beyond the immediate focus of this weekend’s G20 summit, there are other drivers that favour further gains in bullion, including a steady build-up in exchange-traded fund holdings as well as votes of confidence from top banks.

Goldman Sachs Group Inc. recommends an outright long gold position into next year. “If US growth slows down next year, as expected, gold would benefit from higher demand,” analysts including Jeffrey Currie said in a November 26 note that endorsed bullion as one of its top 10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”

Gold futures settled at $1,226 an ounce on Friday, capping the first back-to-back monthly gain since January. That uptick followed two consecutive quarters of declines through to September, with prices hitting a 19-month low in August. So far this year, bullion’s still down more than 6 per cent.

On Wednesday, Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view that the Fed will have to be especially responsive to the data. Minutes the next day, that covered the Fed’s last meeting, signalled policymakers will adopt a flexible approach in 2019.

Powell had earlier stirred a debate over tightening when he flagged potential headwinds to the economy amid a sell-off in equities and concerns over slowing global growth. On Wednesday, he forecast continued solid growth, inflation near the 2 per cent target and low unemployment.

‘Cue to buy’

Joblessness stood at 3.7 per cent in October. Any uptick next year could see a pricing out of hike expectations, said Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne. “If people get a sense that unemployment’s going up, we’re going to see great volatility in 2019,” Weston said. “That’s going to be a cue to sell the dollar, and that’s going to be a cue to buy gold.”

Higher rates are seen to weigh on bullion. Yet, in the two most recent US hiking cycles, gold has risen even as equities climbed because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value.