Market sentiment has become dominated by speculation around the next moves by central banks across the globe, which have generally implemented easing measures that have propped up stock prices and seen bond yields move lower in recent years. As a result, more recently markets have been watching signs from major central banks on the willingness to remove some of their stimulus measures.
Bets on a US rate increase by December climbed after Fed Bank of Richmond President Jeffrey Lacker urged tighter policy, while his Cleveland counterpart Loretta Mester said the economy is ripe for a hike. We will be keeping a close watch on U.S. economic data for indications as to the timing of a Fed interest-rate increase, with important payrolls employment data to be published at the end of the week. There is also speculation the European Central Bank will wind down bond purchases in steps of 10 billion euros a month, according to euro-zone central-bank officials.The US dollar also rallied overnight as confidence in a Fed rate hike is growing, which also saw gold tumble. Gold fell the most in almost three years, falling below $1,300 an ounce for the first time since June amid mounting concern that an improving U.S. economy will push the Fed to boost interest rates soon.
Gold USD/Ounce:
As we have discussed previously, two major areas which are likely to be impacted by US Fed moves are the price of Gold and the US dollar. Given the low level of US interest rates, if the Fed continues on a path towards rate hikes in the near term, believe we will see further weakness in the price of gold as US interest rates move higher. Further, with the expectations of rate hikes coming and no signs of inflation in the near term, the outlook for gold looks even more bleak. As a result, we continue to avoid gold mining stocks.
While gold usually acts as a safe haven for investors during market panic and uncertainty, which saw the gold price rally during Brexit, the gold price is highly sensitive to US interest rate expectations – as rising interest rates lift the opportunity cost of holding non-yielding gold bullion, while boosting the US dollar, in which gold is priced. As we have highlighted in the past, we believe the next leg will be lower for gold as US interest rates move higher – making it more “costly” for investors to hold gold.