Gold trending up, but still stalled by hawkish Fed

NEW YORK - 14 April 2018: Gold has risen more than 3 percent this year, buoyed by international tensions and volatility in equities, but has yet to emerge from a tight trading range in the face of an expectation for rising U.S. interest rates, traders say.

Prices for gold this week rose to their highest levels since Jan. 25, as escalating tensions in Syria, U.S. sanctions on Russia and the U.S.-China trade stand-off weighed on global equities and the U.S. dollar index.

Gold has also outperformed all other precious metals this year.

“We’ve been looking at an uptick for overall gold demand, logically correlated with an increase in volatility, slight downgrade we’re seeing in equities and the Syrian escalations,” said David Meger of High Ridge Futures.

Yet gold failed to break out of the tight trading range it’s been hemmed in for the year, between $1,300-$1,370 per ounce. The possibility that the U.S. Federal Reserve will raise interest rates several more times this year is also capping gold’s gains.

Rising U.S. interest rates increase the opportunity cost of holding non interest-bearing assets like bullion.

“In spite of any geopolitical event, the Fed, and the Fed minutes this week were pretty convincing that three more rate hikes are coming on the table,” said RJO Futures senior market strategist Bob Haberkorn. “That’s going to hang over gold for the rest of the year.”

All Fed policymakers felt the U.S. economy would firm further and inflation would rise in coming months, minutes of the Fed’s March policy meeting released on Wednesday showed.

“The hawkish minutes knocked the wind out of gold’s sails, and we expect to test the downside as we approach the June FOMC,” Standard Chartered Bank’s Suki Cooper wrote in a note this week.

However, gold is rising at the rate it should, given rising interest rates and international tensions, said GraniteShares CEO Will Rhind.

“To me, gold prices are moving up very nicely and investors are doing very well,” Rhind said, claiming it’s unrealistic to expect prices to move much higher than they are now, given no true catalyst.

Concerns that economic growth could stall because of growing U.S. debt levels could help gold later this year, said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.

“It will start to slow the economy down and then in turn, people will start to look at gold as alternative investment,” he said.