The Fed officials have offered hawkish comments recently. What do they mean for the gold market?
As we reported on Monday, a few regional Fed presidents provided hawkish comments last week, strengthening the case for a faster tightening this year than in 2016. For example, Charles Evans considered three hikes in 2017 as not implausible, while Jeffrey Lacker warned markets that the Fed may increase interest rates quicker than investors expect.
Yesterday, Patrick T. Harker, president of the Philadelphia Fed, joined that chorus in his first public speech as a voting member of the FOMC and said that economy was looking good, the labor market was strong, while inflation was returning to the Fed’s target. Hence, he saw “three modest hikes as appropriate for the coming year, assuming the economy stays on track”.
Interestingly, gold shrugged off all these hawkish comments and jumped above $1,200 yesterday (but only for a while). Gold’s behavior signals that the lack of clarity on Trump’s economic policies is now one of the most significant drivers of gold prices. As we wrote after Trump’s disappointing press conference, “the uncertainty about the U.S. economic policy of the new administration is positive for the gold market.”
It seems that the price of gold may increase further until the Inauguration Day on that uncertainty. However, the presidential inaugural address may reduce the uncertainty and end gold’s upward move, just as the presidential election did.
Gold declined in the aftermath of the election, since the biggest political uncertainty was removed from the markets. This is why the yellow metal is likely to decline once Trump moves ahead with his economic plans, whatever they are. However, the decrease will be strengthened if Trump pleases the markets.
On the other hand, if the newly appointed president disappoints investors significantly, gold may go north, even if the uncertainty about the new administration’s policies diminishes.