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LAWRIE WILLIAMS: Gold hammered on U.S. Fed rate decision

The gold price in US dollars reacted badly to the decision by the U.S. Federal Open Market Committee to raise interest rates by 25 basis points.  The $20 fall in the gold price would seem that it may have been overdone given that virtually everyone had been predicting that this time round the Fed would indeed bite the bullet and start to raise rates after a full year of prevarication, but perhaps it was the indication of the expectation of three more rate rises in 2017 that did the damage.  The markets had been expecting perhaps two. 

The pronouncements by President-elect Donald Trump which seem to favour a higher rate scenario next year will also have been in part responsible for the sentiment currently driving the gold price downwards.

The markets obviously also quickly forgot that a similar prediction for rate rises by the Fed during 2016 was made last time it raised rates almost exactly a year ago, but it signally failed to do so given that the U.S. economy did not perform as expected during 2016.  The big question is whether it will do so next year:  the Fed has had a very poor track record in its economic forecasting in recent years.

The dollar rose against virtually every other currency on the news, which in itself will have been responsible for a significant part of the fall in the gold price in US dollar terms:  Gold actually rose in the Japanese yen, the Russian ruble and the South African Rand – the three currencies initially most adversely affected by the dollar index increase.  Equity markets also fell on the news – it will be interesting to see the effects on global equity markets over the next couple of days.  There could be something of a fallout unless things stabilise, or recover, quickly once the initial rate increase impact sinks in.

There certainly are dangers in the implementation of the rate increase – particularly if it is followed by subsequent rate rises as well.  The stronger dollar will likely adversely impact U.S. exports – it will be particularly bad news for companies like Caterpillar which is already seeing its margins squeezed.  The oil price in US dollars dipped sharply too, which will be bad news for the frackers.

As I write the gold price is continuing to fall and the dollar index to rise.  We suspect it will stabilise, indeed it msy be stabilising in the low $1,140s already, and perhaps recover at least part of its fall.  We will see.  Meanwhile the price has fallen back to a level not seen since early February, somewhat confounding the multiplicity of analysts who had been predicting a $1,400 year-end gold price only a few short months ago.

14 Dec 2016 | Categories: Gold

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