Fed’s Delay Has Mixed Impact on Gold Prices
The U.S. Comex gold futures have rebounded from $1,103.30 last Friday to $1,117.10 this Thursday, up 1.25%. During Asia Friday morning, the gold futures jumped one percent as Asia reacts to the delay in Fed rate hike. The S&P 500 Index and the Euro Stoxx 50 Index have risen 1.51% and 2.13% for the week while the crude oil futures have jumped 5.09%. The Dollar Index has weakened 0.68% this week to 94.55. The U.S. ten-year Treasury bond yield declined 10bp on Thursday and ended flat week-to-Thursday. The German ten-year Bund yield widened 13bp this week to 0.778% on Thursday. The VIX has continued to drop this week, falling from 23.20% last Friday to 21.14% this Thursday.
Fed, Not Now but Later
As predicted by the market, the Fed held off raising rate in the FOMC on Thursday, citing risks from the recent global economic and financial developments and a subdue inflation outlook. Most of the governors expect at least one rate hike this year, with the market predicting the probability of a hike this year at 45% as of Thursday, down from 59% on 1 September. The median of the governors’ “dot plot” of rate projections dropped 25bp for 2015, 2016, and 2017.
Implications for Gold
The Fed’s dovish statement about the growth and inflation outlook and its resistance to rate hike raise a question mark how strong the American economy is, helping the case of the gold bulls. A moderate economic outlook and lower inflation will dampen the dollar strength, supporting the gold prices. At the same time, the uncertainty of a rate hike into the next year may keep the gold rally short-lived. Some are concerned that weakness in emerging markets can force the central banks to liquidate their gold reserves.
What to Monitor
We will monitor the September “flash” manufacturing PMI index for China, the Eurozone, and the U.S. on 23 September as well as Fed chairman Yellen’s lecture on the economy at the UMass Amherst, the September Germany IFO business climate, the August U.S. durable goods orders, and the U.S. August new home sales on 24 September.
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