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Gold Soars Even After Federal Reserve Hints at Looming Rate Hike

July 27, 2016 at 18:56 by Andrew Moran

Gold futures rose on Wednesday even after the Federal Reserve hinted at a possible rate hike in the coming months. The US central bank did leave interest rates unchanged for the rest of the summer.

August gold futures climbed $11.19, or 0.85%, to $1,331.89 per ounce at 18:31 GMT. Gold prices have weakened in recent trading sessions as investors have expected the Fed to raise rates later this year.

Silver prices are also making considerable gains. September silver futures spiked $0.47, or 2.37%, to $20.12 an ounce. Silver has not seen $20 per ounce since July 19.

The yellow metal has soared 23% so far this year. Silver has been the best performing commodity for 2016 as it has skyrocketed about 43%.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting on Wednesday afternoon. Although it left its key interest rates unchanged in a range between 0.25 and 0.5%, Fed Chair Janet Yellen kept the door open to a rate hike, which could happen as early as September.

Wall Street did expect the Fed to leave interest rates the same. The Fed has been biding its time, waiting to see how the financial markets adapt to Brexit. The US central bank is also analyzing mixed economic signals.

FOMC minutes from July’s meeting will be released on August 17. These minutes could provide further clues as to when the Fed could raise rates. Also, Yellen will be delivering a speech at the central bank’s summer retreat in Wyoming, which could also provide insight into what she intends to do about rates.

The Fed did publish a statement, though, highlighting that the US economy is improving:

Information received since the Fed policy committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months

According to the CME Group FedWatch tool, the probability of a rate hike in September stands at 18%.

If the Fed did raise interest rates then it would negatively impact gold. With opportunity costs lower, the allure of holding gold decreases because it does not provide any yield. Investors would then return to yield-bearing investments, like bonds, or riskier assets, like oil and stocks.

If you have any questions and comments on the commodities today, use the form below to reply.

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