The Federal Reserve’s tightening regime, which as of Wednesday, Dec. 19th included four interest rate hikes this year, is widely viewed as one of the major factors hindering gold and gold exchange traded funds this year.
Higher U.S. interest rates have contributed to upside that has made the dollar one of the world’s best performing major currencies this year. Commodities, including gold, are denominated in dollars, explaining why ETFs such as the SPDR Gold Shares (NYSEArca: GLD) and the Aberdeen Physical Swiss Gold Shares (NYSEArca: SGOL) have delivered slack performances in 2018.
With the Fed under pressure to ease its tightening trajectory, gold could benefit in 2019 if the U.S. central bank obliges.
“Maxwell Gold, director of investment strategy at Aberdeen Standard Investments, said that growing uncertainty in financial markets could force the Federal Reserve to slow down tightening of monetary policy next year,” reports Kitco News.
Looking Ahead
Much of the near-term thesis for gold revolves around the Fed’s plans for interest rates. The Fed has boosted borrowing costs three times this year and market observers widely expect a fourth rate hike in December. However, President Trump has not been shy about saying he would like to see the Fed slow its pace of rate increases
Expectations that gold normally rallies around this time of year jibe with investors’ sentiment that bullion is poised to rebound in 2019.
Aberdeen’s Gold “said that markets heading into Wednesday’s monetary-policy meeting see a 71% chance of a rate hike and are pricing in a modest chance of two rate hikes next year. He added that expectations for interest rate hikes are at their lowest level since the start of the tightening cycle. Only a few months ago, markets were pricing in four rate hikes in 2019,” according to Kitco.
Some market observers believe commodities can bounce back in 2019 with gold and oil looking particularly attractive.
“In his latest report, Gold said that his base case is for gold prices to trade in a range between $1,275 and $1,325 in the next 12 months; however, he added that there is a growing probability that the firm’s bull-case scenario comes to fruition, which would see gold prices trade between $1,375 and $1,425,
according to Kitco.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.