Gold price may not sell off on day Fed lifts rates – Macquarie

Otmane El Rhazi from The Bullion Desk.

Gold may not necessarily sell off on the day the US Federal Reserve finally starts to normalise monetary policy, Macquarie said.

The members of the US central bank’s policy board are locked in an increasingly public debate on when will be the right time to raise interest rates, which have been near zero since December 2008.

At its last meeting, the Fed removed all calendar references in its forward guidance and said that recent economic weakness might be “transitory” in nature. This means that bank is now entirely dependent on data so a rate increase could happen at any future meeting.

Higher rates are likely to push investors into more yield-bearing assets such as bonds and equities, prompting many investors into questioning what will happen to gold when the announcement is made.

“For many observers of the gold market the answer to that question has long been simple: ‘disaster’,” Macquarie said in a note on Wednesday. “[But] an analysis of previous Fed interest rate hikes shows historically little reaction from the gold price on the Big Day itself when the Fed has raised rates.”

When the Fed last increased rates – by 0.25 percentage points to 5.25 percent on June 29, 2006 – the gold price in fact rallied three percent, the bank noted

While there have been instances where gold has suffered from a change in US monetary policy, gold has gained more often than it has fallen on the 31 occasions the Fed has raised rates since 1994, it added.

Furthermore, investors do not tend to sit around waiting for the Fed to make its decision so the move has largely been priced in already irrespective of its timing, Macquarie said.

“The gold price today is already over one-third lower than its 2011 peak, and much of the decline appears to have stemmed from a dawning realisation in early 2013 among bullion investors that the direction of Fed policy was not always going one way,” it said.

“Investors – in bonds, gold and anything else – do not tend to sit around waiting for the Fed to do things, but anticipate them,” it added.

Gold has predominantly traded in a $1,175-1,225 range this year and was last little changed from the start of 2015 at $1,189 per ounce. It hit lows of $1,142.90 in March, however.

Still, gold prices face some risk, the bank said – the current low-interest-rate environment has fuelled an opinion that the Fed may never be able to substantially increase rates again.

The main bearish consequence of higher US interest rates is that the Fed believes the US economy is now strong enough to withstand higher interest rates, something that should also mean less demand for gold as a safe-haven asset, Macquarie said.

“Such a signalling effect is probably most likely to be felt before the actual rate hike given the Fed’s desire for monetary policy to be well understood by the market, but there is a possibility it might only sink in after the first one, or even a second,” it added.

(Editing by Mark Shaw)

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