The rebound in gold prices was led by the fact that the US Federal Reserve’s indication it would stay the course presented a much more dovish tone than what many market participants had feared. Adding to this was the global turmoil owing to the trade war between the US and China that further helped gold to recover. All in all, gold managed a close at $$1,325 an ounce, a marginal increase of 0.5% in March.
Although the 25-basis point rate hike was widely anticipated, and for the most part factored into existing market sentiment, market participants’ concerns about four rate hikes this year were alleviated. The forecast for two more hikes this year (instead of three) disappointed market participants who turned their backs on the US dollar, triggering a sharp selloff. In his first press conference since becoming chairman of the Federal Reserve, Jerome Powell said that policy makers “don’t have the ability to see that far into the future” and advised investors against reading too far into the central banks’ 2020 projections for interest rates.
Global turmoil good for gold
Global turmoil is once again proving good for gold. US president Donald Trump’s insistence that he would not back down on threats of a trade war over proposed metal tariffs fueled anxiety across global markets. In the face of anger from trade partners China, Canada and Europe, Trump responded in a tweet that “trade wars are good, and easy to win”. The spectre of a heated trade war between the US and China has the marketplace spooked. Investors are “buying back hedges,” in case things deteriorate further on this front.
Outlook for the metal
The trade war dispute between the two superpowers is far from over. China will work towards resolving issues via dialogue and negotiations, but is also prepared for responses. It is hard to imagine that either of the two superpowers will back down immediately which suggests that this dispute will continue. Should there be a “deep trade war,” with ramifications for global growth, industrial commodities such as base metals and energy will be negatively affected, but that scenario would benefit gold.
The new chief at the Fed stuck with Fed’s original forecast of three rate hikes in 2018 whereas markets started imagining the possibility of four. This made the Fed look more dovish relatively.
The optimism was due to a better spell of economic numbers off late. The US economy added more jobs than forecast, the most since mid-2016. U.S factory output rebounded and consumer sentiment jumped to a 14-year high after tax cuts. But absence of persistent inflation seems to be a lingering concern. The CPI moderated from its breakneck pace last month and US wage growth cooled. This could well be the reason for lack of aggression at the Fed.The Federal Reserve is on course to shrink its balance sheet by $420 billion or 9.4% this year and by $600 billion next year as a result of the policy known as quantitative tightening.
Meanwhile, G7 balance sheets are still expanding in aggregate; though the rate of expansion will slow sharply this year, most particularly in the second half, based on the “tapering” schedule outlined by the ECB. The world continues to remain in a state of great disequilibrium, both with respect to the global economy and geopolitics. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.
The writer is senior fund manager. Alternative Investments, Quantum AMC