Gold rallies after rate decision, will it last?

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Gold is continuing to rally today following on from yesterday’s rise after a somewhat dovish statement from the US Federal Reserve regarding the amount of rate hikes they will deliver this year.

As the market expected, the Fed hiked interest rates by 25 basis points so the following statement it what set gold on its path higher.

In the press conference the Fed noted that the economy was moving along quite nicely and especially the jobs market which should warrant another 2 further hikes before years’ end.

The speech caught the market off guard as it had been widely expected that there would be 3 more rate rises this year so on the news investors exited the US dollar into other assets such as gold which was one of the biggest beneficiaries.

“The FOMC statement was more dovish than we thought warranted. At some stage, the Fed will have to grasp the nettle, but the danger is that in doing so, it will bring forward a credit crunch,” said Alasdair Macleod, head of research with Toronto-based Gold money Inc.

“These are good conditions for gold, because we can expect the dollar to weaken.” He added.

Not all analysts are overjoyed about gold’s sudden rally and predict that the market is underestimating the Fed and its future moves with regards to rates.

Caroline Bain, chief commodities economist with Capital Economics believes the US central bank will be more aggressive with tightening monetary policy than was led to believe in yesterday’s statement and when that filters into the market the gold price could suddenly reverse.

“The one commodity which will not be insulated from any negative impact of Fed tightening is gold,” she said

“Although the consensus is coming round to our view that the Fed will tighten four times this year, we do not think this has been factored into the gold price.” Mrs Bain added.

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