Few days ago, gold prices got support from speculations that central banks around the world would increase monetary stimulus to avert economic damages from Brexit. The US Federal Reserves’ stance has been a major factor that helped gold regain its shine this year but a potential interest rate rise has started posing pressure on the gold prices since last month. This could be seen from gold miners that were in red on October 05, 2016 as the precious metal witnessed a big blow on fears of interest rate hike. Spot gold slipped by $US43 or 3.3% to $US1268 an ounce and this fall below the $US1300 an ounce level has been reported to be seen for the first time since June. Further, global index of gold stocks plunged 9.3%.
 


Spot Gold Prices (Source: Financial Times)
 
Traditionally, gold is seen to have an inverse relationship with interest rates and is also used as a hedge against inflation. Monetary stimulus like quantitative easing can stoke inflation, according to many experts and thus the demand for the precious metal usually increases when rates are low. The US Fed wants to start lifting rates but mixed outcome of the economic data has deterred the US Fed to raise interest rates so far.
 
In the September meeting, as expected, Federal Open Market Committee (FOMC) decided to hold interest rates but reduced their outlook for future rate hikes. The focus is shifted to the overall pace of trajectory of monetary policy moving forward. The dollar was under pressure and fueled demand for gold as a store of wealth amid continued easing by the world’s largest central banks. FED funds future remain largely unchanged with expectation still heavily weighted towards a December rate-hike. Earlier, the Fed pointed hikes in its interest rate this year, however officials now foresee a move to a 0.65 percent level this year or a quarter basis point from the current 0.4% funds level (the official policy is to target the rate in the range of 0.25% to 0.50%). Going forward, the committee has reported about foreseeing two hikes in 2017 and three each in 2018 and 2019 that would take fund rate to 2.625% assuming each increase would come in quarter-point increment. Richmond Federal Reserve President Jeffrey Lacker also lately indicated for a strong case for raising interest rates at the back of the argument that borrowing costs might need to rise to keep inflation under control. Also one needs to note that the stronger US data would weigh on gold prices in the near term but it also suggests that gold may be up for volatility in coming days.
 
Gold prices earlier strengthened after the US data showed that US pending home sales fell 2.4% last month, missing expectations for an increase of 0.3% and jobless claims increased by 3,000 to 254,000 compared to expectation of 9000 jobs. Going forward, we need to watch economic growth indicators as well as Fed’s November and December meetings’ outcome, wherein the rate hike is expected, which would guide direction for gold.

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