Gold rebounds as Fed scales back rate expectations

The price of gold surged on the back of the conclusion of the two day Federal Reserve monetary policy meeting.

Bullion.Directory precious metals analysis 18 March, 2015
By Harley Salt
Co-founder, Director of Sales Trading at Bullion Index

The Fed statement saw it lower the GDP growth forecast and importantly also lower its forecast for inflation.

This is important to financial markets as the Fed has said it will look to tighten rates when it is reasonably confident that inflation will hit its 2% objective over the medium ter. With the lowering of its inflation forecast this will see it take even longer to get back to its 2% inflation objective.

Export growth in the U.S. is also weakening according to the Fed which is an acknowledgement by the Fed of the recent strength of the US dollar. The strong US dollar is obviously coming into consideration by the Fed.

Financial markets suggest the Fed is on track to raise rates in 2015, however it seems now the market is expecting rates to move later (e.g. September instead of June) and possible not hit the high levels earlier expected.  

Leading Banks such as Merrill Lynch and Deutsche Bank suggest the Fed will increase rates in September.

I believe no rate rise in 2015 is still very much on the cards and even more so after yesterdays Fed statement.

The longer the Fed holds off moving on rates the better it will be for gold demand given it reduces the opportunity cost between holding non-interest bearing gold and investing in interest bearing assets or term deposits.

I think the strong rally we have seen in gold is in part due to short covering, a lot of traders had entered short trades in the futures market on expectation of a bullish Fed statement.

These traders were caught out and had to move quickly to exit trades as gold moved higher.

Gold traders will now be looking for gold to consolidate and push back towards US$1,200oz.

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