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Gold price soars on dovish Fed pronouncements and Middle East uncertainty

The gold price has been ticking up all year, but has now reached a five year high

Gold and money
Gold and the dollar have an inverse relationship

The gold price spiked sharply to US$1,380 after the Federal Open Markets Committee signalled strongly that lower interest rates in the US are likely, and soon. According to analysis undertaken by Bloomberg, markets are now pricing in a 76% chance of a 25 basis point cut as early as July, with the probability of a 50bp cut at 24%.

Gold and the dollar have long enjoyed an inverse pricing relationship, absent other outside factors, and the gold price has been gradually strengthening over the past few months on a general expectation that rates will be cut.

The latest jump in the price is significant though, as gold is now at a five year high. The turnaround in price is all the more remarkable, given that bears were in the ascendant last year as the Fed was confident then in its pursuit of rate rises rather than rate cuts. That possibility dragged gold below the US$1,300 level as investors took the view that the rising yield on the dollar offered more attractions that the safe-haven but yieldless status of gold.

Now though, the opposite calculation is at play. The chairman of the Fed Jerome Powell has now said that the case for easing has strengthened as the US and the global economies gradually slow, while President Trump is openly bemoaning the latest signals from Mario Draghi that more stimulus might be on the way in Europe.

This dynamic may in turn lead on to a renewal of the currency wars and given that Donald Trump’s long-held argument for a weaker dollar to support exports has now fallen into alignment with Fed policy, it seems likely that the dollar may have further to fall.

That in turn will be good for gold, although it’s hard to know how much of that is already priced in.

The trade war isn’t helping, of course, and Mr Powell is likely to take a significant cue from the outcome of forthcoming talks between President Trump and President Xi a the G20 summit in Japan this month.

Then, simmering in the background is also the uncertainty of the situation in the Middle East. With the dollar in the ascendant last year, Middle East woes were barely able to impact on the gold price. This time round though, with the dollar weak and oil tankers on fire in the Persian Gulf, the resultant negative sentiment might well drive buyers into gold in more serious numbers. They will be encouraged to buy, of course, by the upward momentum already created by the weaker dollar and so we may for a while see the emergence of an upward spiral in the gold price. 

In that context it doesn’t seem that unlikely that gold will go through US$1,400 before too long, perhaps within weeks, if the Fed does cut rates in July.  

“For 2019 we continue to expect a mild-to-moderate overall uptrend for gold, short-term spikes and troughs notwithstanding,” says Yuen Low, an analyst at Shore Capital. He notes the Fed’s concerns about low inflation and “uncertainties.”

Overall, not a bad day at all for the London market to welcome a new mid-tier producing gold miner Resolute Mining Ltd (LON:RSG)(ASX:RSG) into its ranks, although the shares were flat at 68p on the day, following a 10% rise in Australia overnight.

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