LAUNCESTON, AUSTRALIA – It’s not unusual for a financial market to be pulled in different directions simultaneously by competing influences, but what is notable for gold currently is the apparent inability of the contradictory factors to gain momentum.
History and logic suggest that when the United States starts a monetary tightening cycle, gold will underperform, since as a non-yielding asset it loses out to instruments that will enjoy higher yields from the rising rates.
The Federal Reserve lifted interest rates on March 15 for the second time in three months, with expectations that it will raise at least twice more this year and perhaps three times in 2018.
But spot gold didn’t drop when the Fed pulled the rates lever, gaining 1.7 percent the day of the increase, and closing at $1,233.15 an ounce on Monday, up almost 3 percent since the day before the Fed move and 9.9 percent since the recent low in mid-December.
So, why is the gold market being sanguine about rising U.S. interest rates? Part of the answer may be that investors are taking a view that the rise in real yields may not be as dramatic given U.S. inflation is also on an upward trend.
There also may be a U.S. dollar effect, with analysts at JP Morgan noting that it’s likely that the greenback has already seen the bulk of its rally in this tightening cycle.
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