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How Geopolitical Tensions Could Affect Safe-Haven Assets

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Part 5
How Geopolitical Tensions Could Affect Safe-Haven Assets PART 5 OF 5

How Fed’s March Meeting Minutes Could Affect Gold Outlook

Hawkish Fed minutes

The Fed minutes from its policy meeting on March 20–21 were released on April 11, 2018. These minutes were slightly more hawkish than expected. In the March meeting minutes, the FOMC (Federal Open Market Committee) staff review of the economy was stronger than the review presented at the January meeting. The short-term real GDP growth expectation was revised lower due to softness in recent economic data. The medium and long-term projections for economic growth were revised higher due to the expected positive impact of the recent federal budget and tax cuts.

How Fed’s March Meeting Minutes Could Affect Gold Outlook

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According to the minutes, all of the FOMC members expected 12-month inflation (TIP) to increase in the coming months. The FOMC staff expected inflation to reach the 2% target in 2019. A stable growth rate for prices is one of the Fed’s policy objectives. The Fed set a target of 2% for PCE inflation growth for stable economic progress.

Pressure on gold

After the release of the Fed minutes, gold booked its first loss in five trading sessions. The overall tone of the minutes implied more interest rate hikes. Higher interest rates usually boost the US dollar, dulling gold’s appeal and also increasing its holding costs. Both these factors are negative for the gold price outlook.

There is a flip side to this scenario as well. While rising inflation will likely encourage the Fed to raise rates more aggressively, some investors could consider gold as an inflation hedge even if the Fed is raising rates. This, in turn, is positive for gold’s investment appeal.

Rate hikes and gold

The next Fed meeting is in June 2018 and the committee has two more months of inflation and other economic data to consider before deciding on its future rate hike path. Expectations for a fourth rate hike would be negative for gold.

In such a scenario, gold stocks (GDX) (NUGT) such as New Gold (NGD), Agnico Eagle Mines (AEM), Sibanye Gold (SBGL), and IAMGOLD (IAG) could also fall. Year-to-date (or YTD), these stocks have fallen 30.5%, 5.9%, 26.5%, and 11.3%, respectively.

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