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As Fed Rethinks Path for Rates, Gold’s Poised to Jump in 2019

Gold may be poised to rally as speculation mounts that the Federal Reserve will hit the pause button on interest rate hikes in 2019.

After lift-off in late 2015 followed by a rise a year later, the central bank has since steadily raised benchmark rates and is widely expected to do so again this month. But the path after that is clouded after Chairman Jerome Powell said Wednesday rates are “just below” estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments.

It was “getting pretty obvious that at some point Powell would have to flinch,” said Trey Reik, senior money manager at the U.S. unit of Sprott Inc., which oversees $7.6 billion. “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”

While bullion was weighed down in the second and third quarters by a stronger dollar and rising borrowing costs, the dynamic may now be shifting as doubts build over the Fed’s tightening path in 2019. Drivers that favor further gains in bullion include a steady build-up in exchange-traded fund holdings as well as votes of confidence from top banks.

Goldman’s View

Goldman Sachs Group Inc. recommends an outright long gold position into next year. “If U.S. growth slows down next year, as expected, gold would benefit from higher demand,” analysts including Jeffrey Currie said in a Nov. 26 note that endorsed bullion as one of its top-10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”

Gold may be poised to rally as speculation mounts that the Federal Reserve will hit the pause button on interest rate hikes in 2019.

After lift-off in late 2015 followed by a rise a year later, the central bank has since steadily raised benchmark rates and is widely expected to do so again this month. But the path after that is clouded after Chairman Jerome Powell said Wednesday rates are “just below” estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments.

It was “getting pretty obvious that at some point Powell would have to flinch,” said Trey Reik, senior money manager at the U.S. unit of Sprott Inc., which oversees $7.6 billion. “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”

While bullion was weighed down in the second and third quarters by a stronger dollar and rising borrowing costs, the dynamic may now be shifting as doubts build over the Fed’s tightening path in 2019. Drivers that favor further gains in bullion include a steady build-up in exchange-traded fund holdings as well as votes of confidence from top banks.

Goldman’s View

Goldman Sachs Group Inc. recommends an outright long gold position into next year. “If U.S. growth slows down next year, as expected, gold would benefit from higher demand,” analysts including Jeffrey Currie said in a Nov. 26 note that endorsed bullion as one of its top-10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”

Last week, futures capped the first back-to-back monthly gain since January. That uptick followed two quarters of declines through to September, with prices hitting a 19-month low in August. So far this year, bullion’s still down more than 5 percent, trading at about $1,236 an ounce on Monday.

On Wednesday, Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view that the Fed will have to be especially responsive to the data. Minutes the next day, which covered the Fed’s last meeting, signaled policy makers will adopt a more flexible approach in 2019.

Powell had earlier stirred a debate over tightening when he flagged potential headwinds to the economy amid a sell-off in equities and concerns over slowing global growth. On Wednesday, he remained upbeat, forecasting continued solid growth, inflation near the 2 percent target and low unemployment.

‘Cue to Buy’

Joblessness stood at 3.7 percent in October, well below the rate the Fed sees as sustainable in the longer run. Any tick up in unemployment next year could see a pricing out of hike expectations, according to Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne.

“If people get a sense that unemployment’s going up, heaven forbid, we’re going to see great volatility in 2019,” Weston said by phone on Nov. 29. “That’s going to be a cue to sell the dollar, and that’s going to be a cue to buy gold in much bigger size.”

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MARKET SUMMARY

INDICES

Name Last Change
DOW 23675.60 0.35%
S&P 500 2546.16 0.01%
NASDAQ 6783.91 0.44%
TSX 14416.89 0.38%
TSX-V 543.19 0.00%

Resource Commodities

Name Last Change
Gold 1251.12 0.17%
Silver 14.70 0.54%
Copper 2.67 0.090
Platinum 793.65 0.04%
Oil 46.24 7.87%
Natural Gas 3.84 8.08%
Uranium 28.63 0.00%
Zinc 1.17 0.00%

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