Gold prices climbed after the Federal Reserve announced a rate hike last week, with two more to come later this year.
Gold prices had been falling for the previous two weeks in anticipation of the Fed raising rates—a move that would normally strengthen the U.S. dollar and weaken gold. However, the size of the Fed raise caused a reversal. A hike of only 25 basis points was deemed too modest for the inflation that is seen building in the economy.
Federal Reserve Board Chair Janet Yellen also seemed behind the curve in sticking to her guidance of only two more increases later this year. The dovishness of the current Federal Reserve Board only reinforces the assumption that Fed moves will lag inflation, as they have done historically, rather than get ahead of it.
In response, gold prices increased 2.33%. The prospect of negative real interest rates produced by the Fed’s deliberately slow pace has set the table for steady gains in gold prices going forward.
Bloomberg reports, “Gold will rise after the Federal Reserve pledged to stick to its gradual pace of tightening as negative real interest rates deepen and weigh on the dollar, according to Wayne Gordon, executive director for commodities and forex at UBS Group AG’s wealth management unit. … ‘Last night was really setting the scene for the next 3 to 6 months. … Yellen was very, very clear’ that although she sees risks to the economy as balanced and sounded more optimistic, she’s going to stick to three rate hikes this year and three next year, he said. ‘That means real interest rates go deeper into negative territory in the U.S. That means a weaker U.S. dollar, and it means a better gold price.’”
Rick Andrews is the president of Avant Capital Management.