Fundamental Forecast for Gold:Bullish
Gold prices traded higher this week, with the precious metal advancing 0.58% to trade at 1256 ahead of the New York close on Friday. Despite broader strength in the U.S. equity market, gold maintained its luster as Fed Chair Janet Yellen & Co. alluded to a more gradual pace of policy normalization, with the central bank projecting a slower rate of growth accompanied by softer inflation. As such, the Fed may look to buy more time before implementing the next rate-hike as the board continues to monitor external pressures from global markets.
In light of this week’s FOMC interest rate decision where the committee voiced a more dovish stance on policy, gold prices are likely to remain well supported. As noted last week that the, “Last time around, the (dot) plot showed a median expectation that interest rates will reach 1.25% in 2016 – We’ll be looking for a change in these dot plots with our base case scenario calling for a marked move lower in both the mean and median estimates. Remember that we came into 2016 with expectations the Fed will hike rates four times (now an extremely unlikely scenario) and if the dot plot shows a meaningful reduction in the committee’s expectations for higher rates, look for gold to remain on firm footing as investors seek alternative stores of wealth amid continued central bank easing.”
Indeed the dot plot did show lowered expectations for higher rates this year with the majority of committee members suggesting interest rates may stay sub-1.0% throughout 2016. The release charged a marked rally in bullion which was trading lower on the week, but the advance may yet need to see a near-term correction before continuing higher. Bottom line: the delay in Fed normalization will continue prop up gold prices and we’ll maintain a constructive outlook while above the October highs.
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