Gold price shows mettle in face of central bank big guns
New York (Jan 29) The gold price retreated overnight after the Bank of Japan shocked global stock markets with the introduction of negative interest rates.
The minus 0.1 per cent benchmark rate will only apply to deposits by lenders with the central bank that exceed regulatory minimums. But the decision to charge banks for holding excess reserves, designed to encourage more money to be injected into the economy, is still a big move and it responds to consistent demands from investors for support.
DailyFX notes that stimulus from central banks should help to improve economic prospects and in theory mitigates risks, reducing the need "for safe-haven assets such as gold". It has also hit the value of the yen, a key reserve currency, relative to the US dollar. This will boost the greenback, against which gold is held as a hedge and is therefore negatively correlated.
Gold plummeted in Asian trading immediately after the announcement, sinking near to $1,100. DailyFX noted that if a key support level of $1,103 was passed, the metal could even push below this key threshold, which had acted as the ceiling of a tight range earlier in January.
But gold has recovered strongly since the bombshell was dropped and was at $1,114 in London at around 10.30am today. This is just less than $5 less than the price at which it had settled yesterday, even despite a strong rally on European markets that has seen the FTSE-100 nudging 6,000 points.
There are diverging opinions on where the precious metal will head from here. Should the economic travails that have prompted market mayhem so far this year prove to be a harbinger of a more serious global slowdown, gold could rise to as high as $1,300, say some observers. Others who do not see another financial crisis emerging reckon weak inflation, a strong dollar and more rate rises from the US Federal Reserve will eventually lead gold lower for the fourth year in a row.
US central bank in wait-and-see mode amid market turbulence
At the moment, with even the usually stoic Bank of Japan resorting to extreme measures, those predicting tougher times ahead that will benefit gold are arguably in greater number. "We envisage that a bottom is firmly in place for gold," Naeem Aslam, Ava Trade's chief market analyst, told Reuters. "It could be the best performing commodity for this year."
Gold price unmoved as Fed masters mixed message
What are negative interest rates and how do they work?
In the event, it was all something of a damp squib. Initially, the spot price of the yellow metal jumped to $1,127 an ounce, but it quickly retreated from that high and this morning was steady at $1,118 - a virtually identical level to where it has spent most of this week. This reflected the steadier sentiment that has taken hold across Europe's equity markets in the wake of the Fed's statement.
Previously, the central bank had appeared at a loss to convey an effectively nuanced view on its policy intentions, but yesterday's publication finally seemed to show rate-setters have mastered the mixed message. They noted global economic headwinds and weaker domestic data, but suggested it was too early to tell whether the projected path of rate rises set out in December needed to be slowed.
The immediate bounce in gold seemed to reflect the fact that the global economic travails had been acknowledged – and market bets on a March rise are now as low as 25 per cent.
But Reuters points out that "policymakers said the economy was still on track for moderate growth and a stronger labour market even with 'gradual' rate increases, suggesting its concern about global events had diminished but not squashed chances of a rate hike in March".
David Kelly, the chief strategist at JPMorgan’s asset management arm, told the Financial Times: "The Fed carefully toed the line between dovish and hawkish in an attempt to reassure the markets that rate increases will be gradual and data dependent, without sending an overly dovish message that could be interpreted as worrisome for markets."
Another factor holding back gold was investors taking profits after its recent rally, Daniel Ang, an investment analyst at Phillip Futures in Singapore, told Reuters. "I think the safe-haven appeal of gold is tapering off a bit and investors are looking at other havens such as the Japanese yen," he added.
Gold price: what will happen after Fed rates call?
Gold has been resurgent of late and the price rose again on Tuesday, hitting a three-month high above $1,120 an ounce as equities gyrated.
A "safe-haven" rally in the precious metal driven by an awful start to the new year on equity markets has pushed spot prices up five per cent. The equities malaise is itself being caused by worries over Chinese growth and a slumping oil price and these factors, coupled with weaker inflation as a result of lower energy prices, is boosting gold as it is seen as a shore of value.
Some reckon, though, that the latest leg-up has come primarily as a result of the worsening global growth outlook tempering interest rate rise expectations. The US Federal Reserve nudged its base rates up for the first time in nearly a decade last month and had been projected to do so four more times this year, which would be bad news for non-yielding gold.
Latest market predictions, according to the Financial Times, are for the Fed to raise rates just once more this year – and even then, not for many months yet. It is this, according to several analysts, that has "reset" price expectations for gold and pushed it above $1,100 an ounce. It was at $1,118 in London this morning.
In the context of these bets, the meeting of Fed rate-setters currently taking place is very important. Traders are expecting its statement at the end of talks tonight to show a definitively more dovish tone that points to a slower path for rate rises than set out in December. But some brokers, such as BNP Paribas, say they may be disappointed.
"Central banks move more slowly than markets. Those expecting a strongly dovish statement are likely to be disappointed by fewer changes," BNP said in a report cited by Forbes. They expect policymakers to acknowledge wider market concerns, but also to "to highlight strength in the domestic economy and labour market".
BNP, IG Markets and Saxo Bank are thus predicting a more balanced statement that will drive the dollar higher and could hit gold, which may even fall back to the $1,100 at which it spent much of last week. Of course, if the statement is as or more dovish than the market is anticipating, gold could surge even higher still.