Gold Steady, US GDP Meets Expectations

New York (Dec 23)  This week’s gold rally has taken a pause, as spot gold trades at $1073.19 per ounce in the North American session. In the US, Final GDP posted a solid gain of 2.0%. Existing Houses Sales disappointed, while the Richmond Manufacturing Index beat expectations.

There hasn’t been much to cheer about when it comes to gold, as the metal is on track to record another negative year in 2015. Still, gold has rallied since late last week, posting gains of 2 percent. Gold took a hit in the aftermath of the Federal Reserve’s rate hike, and briefly dropped below the $1050 level, marking its lowest level since February 2010. However, gold has rallied since then, posting gains of 2 percent. This strong performance stands in marked contrast to oil as well as the major currencies. Will we see gold resume its rally?

After keeping the markets in suspense for months, the Federal Reserve took the plunge last week and raised interest rates by 0.25 percent last week, the first upward move since June 2006. The Fed dropped a broad hint in its October policy meeting about a rate hike before the end of 2015, and predictably, investors and traders were busy trying to guess whether the Fed would indeed press the rate trigger. To the credit of Fed chief Janet Yellen and her colleagues, the Fed put into place a carefully-crafted strategy, sending a steady of stream of signals that it was intending to tighten monetary policy, if economic conditions remained positive. This gave the markets ample time to price in a rate hike, and currency market volatility was not excessive after the US rate hike, the first in almost 10 years. Although a hike of 0.25 percent is expected to have limited economic impact, the psychological aspect of the rate move cannot be overemphasized, as the Fed has given the US economy a critical vote of confidence. As well, this move is expected to be the first in a series of incremental rate hikes over the course of 2016.