Newsmax: Gold Poised to Jump in 2019 as Fed Rethinks Rate Hikes

December 04, 2018

Article by Bruno Weltmann in Newsmax Finance

Gold may be poised to rally as speculation mounts that the Federal Reserve will hit the pause button on interest rate hikes in 2019.

After lift-off in late 2015 followed by a rise a year later, the central bank has since steadily raised benchmark rates and is widely expected to do so again this month. But the path after that is clouded after Chairman Jerome Powell said Wednesday rates are “just below” estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments.

It was “getting pretty obvious that at some point Powell would have to flinch,” said Trey Reik, senior money manager at the U.S. unit of Sprott Inc., which oversees $7.6 billion. “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”

While gold was weighed down in the second and third quarters by a stronger dollar and rising borrowing costs, the dynamic may now be shifting as doubts build over the Fed’s tightening path in 2019.

Goldman’s View

Goldman Sachs recommends an outright long gold position into next year. “If U.S. growth slows down next year, as expected, gold would benefit from higher demand,” analysts including Jeffrey Currie said in a Nov. 26 note that endorsed bullion as one of its top-10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”

On Wednesday, Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view that the Fed will have to be especially responsive to the data.

Powell had earlier stirred a debate over tightening when he flagged potential headwinds to the economy amid a sell-off in equities and concerns over slowing global growth.

‘Cue to Buy’

Joblessness stood at 3.7 percent in October, well below the rate the Fed sees as sustainable in the longer run. Any tick up in unemployment next year could see a pricing out of hike expectations, according to Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne.

“If people get a sense that unemployment’s going up, heaven forbid, we’re going to see great volatility in 2019,” Weston said by phone on Nov. 29. “That’s going to be a cue to sell the dollar, and that’s going to be a cue to buy gold in much bigger size.”

Higher rates are seen to weigh on gold, which doesn’t bear interest. Yet in the two most recent U.S. hiking cycles, gold has risen even as equities climbed because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value, said Adrian Ash, research director at London-based BullionVault Ltd.

“By themselves, Fed rate hikes aren’t always bad for gold and cuts aren’t always good,” said Ash. “Across longer periods, what the Fed does, matters less to gold than why it changes policy and how the stock market reacts.”

During the previous tightening cycle from mid-2004 to 2006, when borrowing costs rose to 5.25 percent, gold surged more than 50 percent. Since December 2015, bullion’s up about 15 percent.

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