Fundamental Analysis

Gold Prices Pick Momentum Amid Potential End of Fed’s QT

  • Gold prices increased after the FOMC announced a dovish interest rate hike.
  • A decline in US Treasury bond yields drives the rise in gold.
  • The FOMC only projects one more increase in borrowing costs this year.

Gold prices increased on Thursday with a weaker US dollar following the FOMC’s announcement of a dovish interest rate hike, indicating its tightening campaign may end.

Gold traders are elated again after the Federal Reserve confirmed Wednesday’s anticipated small 25 basis point interest rate hike. After retracing from year-to-date highs on Monday and Tuesday, the shiny metal has regained the $1,980 level and is again moving upward.

The extremely significant central bank move has helped all precious metals, with silver setting off a seven-week high and surging beyond $23 to maintain its upward trajectory.

This move was driven by a decline in US Treasury bond yields, with the benchmark 10-year bond now yielding below 3.5% due to the Fed’s decision. The US Dollar, which serves as a measure for all commodity markets, including those for gold and silver, is also driving this trend. A weaker dollar makes gold cheaper for holders of other currencies.

The Fed is now taking a considerably more cautious attitude and projecting a less aggressive hiking cycle than it did only a few weeks ago. This is a result of recent instability in the banking industry.

The FOMC only projects one more increase in borrowing costs this year, from 5.00 to 5.25%, much below the peak rate of 5.70% that the market had projected earlier this month.

Fed rate cut bets by the traders (Source: Reuters)
Fed rate cut bets by the traders (Source: Reuters)

Short-term Treasury rates and rate futures markets have experienced huge fluctuations over the past month. Traders currently project a 50% chance of another quarter-point Fed raise in May, but more than half a point of cuts by year’s end despite the Fed’s guidance.

This is expected to be positive for non-yielding assets, such as precious metals since the terminal rate is within reach and there is growing belief that the central bank will relax policy soon after.

This suggests that gold may continue to rise over the medium term, particularly if financial instability reappears and poses a risk to the system.

Few investors believe the financial stress has completely subsided, especially after Treasury Secretary Janet Yellen’s opposition to recommendations of a blanket insurance of all US banking deposits. Furthermore, no one is yet certain how it will affect lending and the overall economy.