March BoJ Meeting And Gold

Yesterday, the Bank of Japan kept its monetary policy steady. What does it imply for the gold market?

Kuroda Holds Fire

The Bank of Japan (BoJ) kept its monetary policy unchanged in March. First of all, it left the deposit rate unchanged at minus 0.1 percent. It also maintained its commitment to raise the monetary base by 80 trillion yen annually. Thus, the BoJ held fire and we will not see further cuts deeper into negative territory, at least for a while. Surely, Kuroda said today in Japanese Parliament that theoretically there was room to slash interest rates to around minus 0.5 percent. Surely, theoretically, the BoJ can reduce the rates to minus infinity. But there is theory and there is also practice. And practice says that NIRP is harmful and unpopular among the Japanese financial establishment. Therefore, Kuroda had to say something like that to simply not make Draghi’s mistake and to not let markets think he has run out of bullets. However, in the statement on monetary policy the BoJ dropped a reference that it would cut negative rates even more deeply if needed. Moreover, it also widened exemptions to its negative rate policy to include $90 billion in money-reserve funds (MRFs). The message is clear: we are retreating from NIRP, or at least de-emphasizing it. Perhaps, the BoJ wants to examine the effects of the last cut before any further extensions of negative interest rates.

It is worth noting that the BoJ offered a gloomier view on the economy. The central bank said: “exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies” and “sluggishness is expected to remain in exports and production for the time being”, while expectations of future inflation have “recently weakened”. Now, usually, when a central bank is more pessimistic about the economic outlook, it eases its monetary policy. However, the BoJ clearly de-emphasized NIRP as a possible policy tool in the nearest future. It means that the negative interest rates were very poorly received by the Japanese financial system, worse than expected.

BoJ Meeting And Gold

Holding fire by Kuroda will have two major implications for the gold market. Firstly, de-emphasizing negative interest rates as a policy tool should calm the markets and reduce the safe-haven demand for the yellow metal. The hype about NIRP may calm down, which would be negative for gold. On the other hand, the BoJ’s actions clearly signal that it is running out of ammunition and that there are limitations to monetary policy. The reduced confidence in central bankers is bullish for the yellow metal.

Waiting For The Fed

Yesterday, gold traded sideways. It seems that investors are now waiting for the outcome of the Federal Reserve policy meeting. The U.S. central bank will update its “dot plot” to reflect the median rate hikes for 2016, there will also be Yellen’s press conference. Although the latest report on retail sales was anything but strong (especially revisions of January numbers), the Fed could be rather hawkish in March (although the median of rate hikes is expected to be lowered). Much depends on today’s numbers on CPI, housing starts and industrial production. The U.S. central bankers will probably point out that markets have calmed down a bit, and the stock market has risen since the last FOMC meeting. Indeed, markets are starting to price in hikes – not today, of course, but in June or July. The current odds for one hike in June are 40.1 percent (moreover, the chance of two hikes is 8.1 percent), while a month ago the odds were just 14 percent. It is an important change. And if the Fed is sufficiently hawkish, the expectations of next hikes may further increase. The rise in such expectations should be negative for the price of gold.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium-term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.