A dovish Fed, weaker-than-expected inflation figures, and forecasts for a weaker dollar were cited as the three triggers for a rally in gold prices this week, as markets lowered their forecasts for tighter US monetary policy. Having touched a three-month low at the beginning of July, the news sent the yellow metal quickly back towards $1,250 (£958) an ounce. Silver followed suit, nudging past $16 an ounce.
In the run-up to her testimony to US congress earlier this month, Federal Reserve chair Janet Yellen had been expected to deliver a more a hawkish tone; that is, a renewed commitment to raise interest rates and start shrinking the country’s balance sheet before the end of 2017. In the event, Yellen and her Fed colleagues sounded less determined in their bid to wean the US economy away from easy money supply, despite data suggesting the country is approaching full employment.
Theoretically, gold investors should fear the prospect of tighter monetary policy from the world’s most powerful economy. Interest rate hikes are designed to calm inflationary pressures and increase the value of the greenback, which competes with gold as a store of value. That’s the logic, anyway; recent history is more complicated. Some analysts see a greater threat to gold prices comes when the metal’s physical supply outpaces new money supply. This is of course complicated when loose monetary policy funnels cash into asset markets – such as equities and bonds – rather than consumer goods.
According to HSBC, physical demand for gold is currently mixed and global supply “toppy”. However, paper demand continues to pick up whenever there is a dip in gold. ETF Securities saw strong inflows into precious metals funds, reversing outflows seen earlier this summer.
Then there is the threat of geopolitical unrest, against which gold has long been seen as a cushion. Following the Brexit and US presidential votes in 2016, market prognosticators had understandably trained their eyes on further populist victories in the ballot box, suggesting rising protectionism would lead to increased safe-haven demand for gold. Major electoral shocks have eluded 2017 so far, but that doesn’t mean political risks have receded.
