The World Gold Council (WGC) on Tuesday released its latest ‘Investment Update: The impact of monetary policy on gold’ publication, in which it outlines expectations that the upcoming Federal Reserve Open Markets Committee (FOMC) meeting on March 20 will confirm market expectations that the Federal Reserve (Fed) will hold interest rates steady for the rest of the year.
This, in turn, will likely influence gold’s performance, the council said.
“Our historical analysis has showed that when the Fed has shifted from a tightening to a neutral stance, gold prices had increased, even if the affect has not always been immediate.
“In our view, the combination of rangebound US interest rates, a slowdown in the appreciation of the dollar and continued market risks will continue to make gold attractive to investors.”
In its 2019 Outlook, the WGC cited “monetary policy and the direction of the dollar” as key trends to watch for this year.
As it stands, current bond prices, which are reflecting market views based on interim cues from the Fed since the last FOMC meeting on December 19, are signalling that the Fed will most likely keep rates unchanged for the rest of the year, the WGC said.
Bond market participants are even pricing a small chance of a cut (15%) for the first time in several years.
The March 20 FOMC statement, combined with the Fed’s economic projections report, will provide more clarity about the committee’s monetary policy expectations for this year.
This, in turn, will offer further guidance on gold’s likely performance in the coming months.
The WGC said that while no clear evidence points to an immediate positive impact on the price of gold after the Fed pauses interest rates, historical analysis suggests that gold eventually reacts positively as the pause cycle extends and/or the Fed eases monetary policy.
“Historical post-tightening periods have shown an eventual strong gold performance, counterbalancing the performance of risk assets such as stocks or commodities, and complementing – sometimes even outperforming – assets such as treasuries and corporate bonds,” the council stated.
The WGC added that if the Fed were to signal a more dovish stance and the dollar remains rangebound, this will likely remove some of the strong headwinds that gold faced in 2018.