Fed’s Policy U-Turn a Positive Development for Gold

Similar U-turns in the past have resulted in significant increases in gold prices.

fed u-turn bullish for gold

Not long ago, some were forecasting that the Federal Reserve would raise interest rates up to four times this year. After all, the central bank had been on a hawkish run since 2015, sticking to a schedule that involved a minimum of three hikes per year.

Towards the end of 2018, the forecast was downgraded to an expected two hikes for this year. But after last week, it appears that the Fed might not budge interest rates at all in 2019. Fed officials hinted at this during last week’s meeting, in what was perhaps the biggest display of dovishness since the tightening schedule started. According to an article from Kitco, this is a highly positive development for gold prices.

Despite the metal’s time-proven ability to perform well even amid successive hikes, periods of monetary tightening generally push gold prices down, whether through sentiment or a strengthening of the U.S. dollar. Thus, the shift in Fed policy will remove a major headwind for an asset that has outperformed since the beginning of the year, writes Kitco.

The World Gold Council concurs, stating that similar U-turns in Fed policy in the past have resulted in significant increases in gold prices. In their latest analysis, the WGC took note of gold’s slight price dip over the last week, urging investors not to pay too much attention to it and instead focus on the bigger picture.

As the WGC pointed out, the previous two dovish shifts in Fed policy had a similar effect. According to Kitco, in 2001 the Fed’s tightening wrap-up caused gold prices to sink in the short-term, yet bounce back and post gains over the following 12 months. The same thing happened in 2007: gold went down after the Fed stopped hiking rates, only to end up nearly 20% higher within a year.

John Reade, the WGC’s chief market strategist, said that investors should take special note of this as equities become less and less attractive. In fact, Reade believes that we are witnessing the end of a decade-long recovery in the stock market, reports Kitco. This, along with gold’s historical price movement following changes in Fed policy, leads Reade to think that now is a good time for investors to increase their allocation to gold.

According to Kitco, the Fed’s policy shift and growth forecast downgrade carry deeper implications than the minutes from the meetings suggest. Experts have long warned that various U.S. economic data points to an imminent growth slowdown, something that Fed officials largely ignored as they chose to power through with their hawkish agenda.

Likewise, many have noted that nearly every U.S. hiking cycle in the past culminated in a recession not long after the Fed’s wrap-up. Should a crisis indeed hit the markets following the Fed’s change in policy, Kitco suggests gold’s price gains since the start of the year could mark the beginning of a long-term bullish trend.