The Fed Gives Gold Bulls a Reason to be Optimistic

You will notice that on December 13, gold had its largest gain in three weeks. What happened? The Federal Reserve gave gold bulls some relief when it stuck to its projection of three rate hikes in 2018.

This eases a main concern that the current pace of economic growth would press the Fed to tighten monetary policy at faster rate. As you know, lower interest rates traditionally make gold less competitive, as interest-bearing assets would provide a stronger return than gold, which does not yield interest.

In a Fed statement following the last FOMC meeting, prior language describing expectations of labor market strength had been omitted. According to Naeem Aslam, analyst for London-based TF Global Markets, “Gold moved up in its initial reaction because Fed is dovish in terms of a rate hike vision for 2018, and it sees only three rate hikes, not four.”

Having surged this year from January to September, gold is currently experiencing its worst quarter this year. Nevertheless, gold is still trading above 1,200--a critical support level—and two other critical support levels (1,050 and 1,120) which indicate that gold’s uptrend beginning in 2016 remains intact.

Perhaps economic data, most of which has been optimistic this year, had spread expectations among investors that a faster pace of monetary tightening was on the horizon.

Recall that just last November, the state of the market and the risk of Fed actions (raising interest rates) were a major issue during the 2016 election as you can see below:

The Fed’s recent statements now indicate that such a scenario will likely not happen, and that gold’s favorability is in a clear and advantageous position.