Globally, gold hit its lowest since early February, after the Federal Reserve sounded an unexpectedly hawkish note on US interest rates, sparking a surge in Treasury yields and sending the dollar to a 14-year high. Spot gold hit a 10-1/2 month low of $1,132.15 an ounce, and was down 1% at $1,132.70 an ounce in early trade on Thursday.
The US dollar had surged to 102.63 on Thursday – the highest since January 2003 – in response to the rate increase and hawkish statement from the FOMC. The index was recently at 102.27, up 0.02% from Wednesday’s close.
The US Federal Reserve raised the federal funds rate by 25 basis points to 0.5%-0.75% – the increase, a first since December 2015, was widely expected in the market. Expectations of further expansion in economic activity and labour market strengthening, as well as a further rise inflation, were reasons cited for the increase.
In US data released on Wednesday that further supported the rate hike were-
- November core retail sales at 0.2% undershot the forecast 0.4% as did retail sales at 0.1% against expectations of 0.3%.
- The November PPI bettered expectations at 0.4% while November industrial production fell -0.4% compared to consensus for a 0.2% decline.
- Yields on ten-year US Treasuries gained by nearly 2.6% in response, and the US dollar appreciated significantly.
- The nearly 22 tons of outflows from gold ETFs that were reported were the most pronounced on a single day since July 2013.
- Meanwhile in China-
- Data released on Wednesday showed November Chinese M2 money supply as expected at 11.4%,
- China’s November new loans at 795 billion yuan ($115.3 billion) were up on the forecast of 750 billion yuan.
The spot gold price plummeted to below $1,140 per oz during Asian trading hours on Thursday December 15 after the US Federal Open Market Committee (FOMC) lifted the federal funds rate for the first time in a year on Wednesday
Gold prices plunged at the domestic bullion market in Mumbai on Thursday following sustained selling by stockists and investors coupled with subdued local buying interest. Gold prices fell overseas after the US Federal Reserve raised interest rates for the first time in a year and signalled more rate hikes in 2017.
But Friday we saw gold prices stabilising, thus recovering from the lows as markets started accepting and digesting the news of the rate hike,
Gold has pushed back after taking another battering in a miserable quarter. The precious metal rose to trim a sixth weekly loss that’s been driven by a more aggressive Federal Reserve, investor enthusiasm about President-elect Donald Trump’s policies and sales from exchange-traded funds.
Although the Fed raised interest rates by 25 basis points as expected, it then surprised the market by raising the prospect of three further rate hikes in 2017 – thus announcing the start of a new cycle of rate hikes. The market had previously been expecting two further rate hikes next year. Unlike with hints that have been made in the past, the market appears to be believing the Fed this time around, and has already partially priced in a third rate hike in 2017.
With the US interest rate decision now out of the way, we wait to see whether the market now focuses on all the uncertainty that 2017 brings – namely;
- How the newly elected US president will make a difference to the market
- The fallout from Brexit
- How emerging markets will react to what looks likely to be a more hawkish US monetary policy
With such uncertainty bound to surface in 2017, markets once again will get into the alert mode.