Federal Reserve Smells Inflation – Morningstar

Release Date: 
Friday, March 17, 2017

Defying conventional wisdom, gold prices rose following the Federal Reserve’s announcement of an interest rate hike which will likely be followed by two more hikes this year.

“Gold is seeing a solid bounce as investors deemed Fed Chair Janet Yellen’s comments around a 'quite low' neutral Fed Fund rate as dovish, despite the fact that the U.S. central bank raised interest rates by 25 basis-points and maintained its guidance for a total of three rate hikes for 2017…

“George Milling-Stanley, head of gold investments at State Street Global Advisors, said in an interview with Kitco News that the reaction in the gold market was exactly what he was expecting to see following the central bank’s monetary policy decision. He added that even after gold’s $30 rally, it should have enough momentum to move higher in the near term… ‘“If we see more interest rate hikes later this year it is because we have the inflation to support them. Ultimately real rates will remain low to negative and that is good for gold….’”  (“‘I was Right’: Fed Not Bad For Gold – Milling-Stanley,” Kitco, 3/16/17.)

Gold ended the week up $24.30, closing at $1,229.80. Silver prices closed at $17.47, up $0.35.

Federal Reserve Smells Inflation – Morningstar
Morningstar, a global investment research firm, wrote that gold’s significant rise following the Fed’s interest rate hike reflects growing concern about inflation.

“The gold price rose 2.3% to $1,230 yesterday after the Federal Reserve raised interest rates in the US amid signs that inflation is moving higher. The gold price reaction was a surprise; in general when interest rates rise, the price of the precious metal will fall. This is because rising rates are a sign of a healthy economy, and gold is used as a hedge against recession and uncertainty.

“But today gold price has its eye on the bigger picture – and investors are turning to the yellow metal in anticipation of that great destroyer of value; inflation. Even with two rate rises in the last four months, the Fed's real rate of interest has in fact declined, dropping from -1.5% to -1.7% when you factor in rising inflation, said Adrian Ash, head of research for BullionVault, the UK-based online trading platform. ‘That means the dollar is losing value at a quicker pace, even as Janet Yellen tries to talk tough. If the Fed can smell inflation, then gold will certainly know about it too. That's why, since 1986, gold has been more likely to rise if rates go up than if they stay the same, and by a greater percentage as well,’ said Ash. Ash added that when looking at the long term, a US interest rate rise has also been followed by much stronger gold gains than a cut, and more frequently too….” (“Gold Bounces Despite Fed Rate Rise,” Morningstar, 3/17/17.)

Fed Preparing For Negative Interest Rates – UBS
UBS’s director for commodities, Wayne Gordon, believes the Federal Reserve’s modest interest rate hike in the face of rising inflation indicates the central bank is preparing for negative interest rates.

“Gold will rise after the Federal Reserve pledged to stick to its gradual pace of tightening as negative real interest rates deepen and weigh on the dollar, according to Wayne Gordon, executive director for commodities and forex at UBS Group AG’s wealth management unit… ‘Last night was really setting the scene for the next three-to-six months… Yellen was very, very clear’ that although she sees risks to the economy as balanced and sounded more optimistic, she’s going to stick to three rate hikes this year and three next year, he said. ‘That means real interest rates go deeper into negative territory in the U.S., that means a weaker U.S. dollar and it means a better gold price….’” (“Gold Seen Climbing as Yellen Sets Scene for Negative Rates,” Bloomberg, 3/17/17.)

ABN AMBRO Tells Investors Dollar Rally Over, Buy Gold
Business Bank ABN AMBRO told investors that the dollar rally is over which is bullish for gold prices.

“Markets were positioned for a more hawkish Fed in both of its tone and its dot plot but the Fed did not meet these expectations as instead [signaled] a gradual approach for rate tightening with only two more rate hikes this year, notes ANB AMRO Research...
ABN AMRO projects that the broad USD weakness post-FOMC is likely to persist over the coming days. ‘It is likely that the US dollar rally has come to an end and that more downward pressure is building in the near-term...’ ANB AMRO also thinks that weakness in the gold price is over for now and a move back towards USD 1,250 is on the cards in the coming weeks.” (“USD: Rally Has Come To An End; Gold: En-Route To $1250 - ABN AMRO,” EFX News, 3/16/17.)

Gold Best Performing Asset Since 2000 – Hathaway
John Hathaway, portfolio manager for Tocqueville Asset Management’s $12 billion fund, told Forbes that gold is the place to be for investors due to “radical” monetary policies.

“Tocqueville Asset Management, which currently manages approximately $12 billion in assets, launched its gold strategy back in 1998 when gold was very disrespected. It was the Rodney Dangerfield of investment ideas. Tocqueville is at its core a contrarian firm. And we thought that in those days, when investors were chasing dot-coms and overpriced technology stocks, we should do something that was value based. That thinking led us to launch the Tocqueville Gold (NASDAQ: TGLDX) fund in 1998. That fund now has about $1.4 billion under management. And in addition, we have another $1 billion or so of separate accounts and funds that we manage for European clients and separate institutional accounts…

“I feel like we've turned the corner and have had our correction. Gold has been the best performing asset class since 2000. It's out-performed bonds -- it's out-performed stocks, and it's out-performed the U.S. dollar because gold prices are significantly higher than they were in 2000. Everyone says, ‘Well, why is that?’ The reason is that we've been living since 2000 in an era of radical monetary policy. So that’s why gold has been a good place to be...

“If you like gold, you have to like silver. Silver is like gold on steroids. If we're right about gold prices, silver will do just that much better.… (“Gold Has Been The Best Performing Asset Class Since 2000: Here's Why It's Still A Good Place To Be,” Forbes, 3/13/17.)

Silver Prices Support By Strong Institutional Buying – Silver Institute
The Silver Institute reported the rising silver prices are principally due to renewed interest by institutional investors.

“The silver price has started 2017 on a positive tone, rising by roughly 9 percent since the beginning of the year. The strength of silver prices is largely due to improving sentiment among institutional investors. Changing expectations towards the outlook for U.S. interest rates and the proliferation of negative policy rates across other key reserve currencies has rekindled institutional investor interest in precious metals. Meanwhile, a marked improvement in silver industrial offtake, led by photovoltaics, which achieved a record high last year, is also helping…

“’We expect that the factors that buoyed institutional silver investment over much of 2016, and have carried over into the early months of 2017, will remain relevant for the remainder of this year,’ stated Michael DiRienzo, Executive Director of the Silver Institute.” (“Strong Institutional Investment Pushes Silver Prices Higher,” Silver Institute, 3/16/17.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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