Gold prices leaped on Wednesday, 20th March, to $1.309 an ounce, up 0,19% on that day, following the Federal Reserve's unexpected dovish stance. The FOMC announced its decision to keep interest rates unchanged (between 2,25% and 2,50%) and no further rate hikes for 2019 versus the initially prognosed two rate hikes. It also announced that it will end its balance sheet runoff in September this year. This decision led to the US dollar plunging over night against its rival currencies and the EUR/USD surging to a six-week high.
Monetary Policy and the direction of the US Dollar have been a key trend to watch out for in 2019 to determine the direction of gold performance, but why is this so important?
A short historical analysis.
Historically, gold performance has increased when the Fed shifted from a tightening to a more neutral stance. This effect may not always have been immediate but it has been apparent and the current cycle is similar to the last two cycles: 1999-2000 and 2004-2007, suggesting an upward trend in gold prices is possible in the near future:
- Continuous rising gold prices over at least a 12-month period as witnessed in both cycles
- A flat or inverted yield curve as was apparent in both cycles
- Falling retail sales which also occurred during both cycles
- Worsening credit conditions as happened during the 2006-2007 cycle
- Unusual extensions of risk assets' valuations during 2000
- Peaking oil price during 2000
Basis the above there is a tendency towards increased gold performance during a post-tightening cycle. In 2001 it took 12 months for the gold price to rise 3.6% (12 months after the Fed stopped raising rates). On the hand, in 2007, it took only one month for the gold price to rise by 7% and 19% a year later. In 2008 gold significantly outperformed all other major stock markets. The average annual performance of gold from 2001 to 2019 has been +9.1%.
Though there is an eventual visible strong gold performance it is not only the outcome of the FOCM that has an impact on this nor is this the only reason one should consider to add gold to their portfolio at this moment in time. Gold is and remains a safe-haven asset providing a source of return, diversification and liquidity to one's wealth especially during times signaling a potential pre-recession phase. Demand and prices may therefore increase further on the basis of the following global financial markets risks:
- The trailing road to current recovery which may be a sign of economic exhaustion
- The flatting and inverting of key yield curves could well be a sign of a possible recession
- Markets are reaching uncomfortably lofty valuations as last seen during the dotcom bubble and increased volatility
- Consumer and corporate investors are having to deal with worsening credit conditions
- Ongoing uncertainty surrounding trade negotiations between China and USA
- Uncertainty on Brexit and its global implications
Tides are turning in the global monetary set-up.
The global economy is dominated by the US Dollar however faith in the USD currency is diminishing which is measured in the proportion of global currency reserves held in US Dollars. Over recent years we have seen especially emerging countries steadily expanding their gold reserves. Central bank gold reserves of China, Russia, Turkey and India have substantially increased by 209%, 428%, 118% and 68% respectively since 2007 up to Q4 2018. A clear signal in the growing distrust of the US dollar and the global monetary and credit system therewith associated.
Precious Metals continue their rally today, 21.03.2019 noon (GMT+2):
Gold (USD)1.317,63 +0.17% (20.03.2019)
Silver (USD)15,593+0.52% (20.03.2019)
Platinum (USD)868,51+0.15% (20.03.2019)
Palladium (USD)1.605,92+0.31% (20.03.2019)
Source of information: World Gold Council | Investment Update: The impact of monetary policy on gold
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.