Investment Update: The Impact of Monetary Policy on Gold
The comments below are an edited and abridged synopsis of an article by World Gold Council
March’s Federal Reserve Open Markets Committee (FOMC) meeting was expected to confirm that the Fed will remain on hold for the year. This will likely influence gold’s performance. Historical analysis shows that when the Fed has shifted from a tightening to a neutral stance, gold prices have increased, even if this effect has not been immediate. The combination of rangebound US interest rates, a slowdown in the appreciation of the US dollar, and continued market risks will continue to make gold attractive to investors.
In its 2019 Outlook, the World Gold Council cited monetary policy and the direction of the US dollar as key trends to watch this year. It said that the March meeting, which included the Fed’s projections report, would provide more clarity about its monetary policy expectations, and thus offer guidance about gold’s performance this year. Current bond prices are signaling that the Fed will likely be on hold during 2019.
Up for discussion: Rates have become more influential; drivers of gold; implications for gold; and adding the effect of rates to other key gold drivers.
In short, while no clear evidence points to an immediate positive impact on the price of gold after the Fed pauses, historical analysis suggests that gold eventually reacts positively as the pause cycle extends and/or the Fed eases monetary policy.
Historical post-tightening periods have shown an eventual strong gold performance, counterbalancing the performance of risk assets such as stocks or commodities, and complementing—sometimes even outperforming—assets such as Treasuries and corporate bonds.
