Gold’s Price Holds Off: Is A Fed Hike Coming?

Is gold in retreat? CNBC seems to think so, noting that the yellow metal has enjoyed a strong 2016 but, as of late, appears to be holding off on more impressive gains. That’s a fancy way of saying that gold has been going down lately, never faithfully cracking the psychological $1,300-an-ounce barrier, but, instead, holding off, as interesting policy changes could loom with the Federal Reserve.

The Federal Reserve is scheduled to meet in June, and more and more investors are beginning to forecast that rates will be raised at that time. But, what is the evidence that this Fed rate hike is going to happen? What are the potential consequences for gold if it does indeed occur this June? Let’s take a closer look.

Watching The Price Of Gold

The first piece of the puzzle is the price of gold, especially as it relates to the U.S. dollar. Frequent readers will know that gold is pegged to the U.S. dollar because of the pricing system. This means that a stronger dollar, which sometimes comes with rumors of rate hikes, often results in a lower gold price, and vice versa. If the dollar remains strong, then there’s only so much that supply and demand for gold can do to push gold prices upward.

Bloomberg notes that gold fell for a fifth straight day, with the Bloomberg Dollar Spot Index showing the currency at its highest since about March. With a 1.7% drop-off in gold last week, it’s apparent that some investors are a little skittish about the prospects of gold prices going up, or, at the very least, that the dollar is holding on to its strength for now.

But, what about the involvement of the Federal Reserve?

Is Gold Slated For A Rough Summer?

Jonathan Butler told Bloomberg via email that, “A June rate hike is back on the cards,” pointing out that the dollar is performing well on these expectations. That’s bad news for short-term gold investors, who thought that the precious metal was going all summer long - and all through 2016.

With gold moving back through the mid-$1,200 point, and perhaps lower, what will remain interesting for long term gold bugs is when it might be a good time to buy the precious metal. If this is merely a short-term dip, then it stands to reason that it might be the right time to buy for the long term. Still, the looming Federal Reserve rate hike suggests that optimism for gold might be postponed for at least a month, as investors watch to see what Chairperson Janet Yellen does, and how the Federal Reserve reacts to the economy.

But let’s leave off with a note from the other camp. Steen Jakobsen of Saxo Bank believes that a Fed rate hike would be a mistake for the economy and that the Federal Reserve can only plan on raising rates now to bring them back down later. Either way, it should make for an interesting summer.