Although gold has backed off from its recent highs, the uptrend seen in the yellow metal since the first of the year remains intact. Although the gold market has likely seen some benefit from uncertainty surrounding the Trump administration and implementation of its policies, the yellow metal may face some significant headwinds in the coming weeks.
Gold investors may have a hard pill to swallow when it comes to the Fed and interest rates. Just days ago, it was thought that the central bank would almost certainly hold off on any further rate hikes until June. That would give the Fed the chance to see what policies the new administration may be able to put into action, and also how they might affect the broader economy.
Recent commentary from Fed Chairwoman Janet Yellen and numerous other Fed officials, however, points to a central bank that is ready to act now.
The Fed Chief left little doubt on Friday that the central bank was ready to act this month and lift the benchmark Fed funds rate again. Ms. Yellen said on Friday that if the economy stays on its current rack, a rate increase “would likely be appropriate.”
What perhaps caught some investors off-guard was other comments that may be indicative of the central bank being even more aggressive with rates this year than previously thought.
The Fed has penciled in three rate hikes for 2017, but given recent economic and inflation data, four would not be a stretch by any means.
How this may affect the gold market remains unclear. The next few weeks, however, may be very telling.
The notion of rates rising faster than expected may also boost the dollar, which could potentially challenge its post-election highs. A higher greenback could also potentially weigh on the yellow metal in the coming weeks.
Looking at the bigger picture, even with multiple rate hikes this year, rates remain historically low. Gold investors may not become too distressed about a Fed funds rate of one or two percent.
Although some might argue that Fed tightening is bearish for gold, further rate hikes also have the potential to benefit gold.
The stock market has been climbing and climbing and then has climbed some more. Some might argue that stocks are artificially elevated due to ultra-low interest rate policies and QE. It is also important to keep in mind that stocks have been rising for several years now. A recession could also potentially be in the cards in the coming months.
If equities finally begin to show signs of cracking, gold could potentially see additional capital inflows. A more aggressive Fed could potentially fuel selling in stocks.
The gold market may see some further selling, but prices may not fall too far. There remains a degree of risk aversion in the marketplace that won’t seem to go away. The Trump administration continues to deal with an image problem, and there are still calls for an investigation into possible ties to Russia.
These issues are not likely to be swept under the rug, and could potentially fuel ongoing buying in gold with or without further rate hikes from the Fed.
In the meantime, a March rate hike from the Fed may provide a decent test of the gold bulls’ resolve. The absence of any significant selling could potentially be construed as an underlying sign of market strength.