Tag Archive: Interest Rates Rise
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Why is the Gold Price Up 6.35% in Sterling this Month?
It isn’t long after writing my gold forecast for 2016 that I am re-reading it and thinking how much more of it will come true.
As I had suggested in it, so far this year we have had middle-eastern rising tensions and poor data from China, two prominent aspects of my gold forecast that were set to boost the price. The one augury in my forecast that I thought would happen sooner rather than later was a Bank of England rates rise. In my mind the UK were going to have to follow the US sooner rather than later to keep the strength of the pound – but Mark Carney yesterday whilst speaking at Queen Mary’s University London, stated that an interest rates rise for early this year was off the cards. Understandably, as Carney cited yesterday, given the current attenuating global economy, the oil price dropping further combined with poor UK wage growth, an interest rates rise has been pushed back. It is possible that if the global economy conditions continue in this vein, a rates rise may well be set back further than expected: late 2016 early 2017. Click here to read Carney’s full speech here.
The gold price so far: Jan 4th – Jan 20th
In numbers the gold price opened on 4th January:
£725.019 / $1072.70 / €982.299 with currency GBP – USD at 1.4716.
Today Wednesday 20th January, the gold price opened:
£771.081 / $1093.20 / €999.726 with currency GBP – USD at 1.4158.
In total the gold price has moved: £46.062 (+6.35%) / $20.5 (+1.91%) / €17.427 (+1.77%) with currency -0.0558 (-3.79%).
With the Sterling price against the Dollar falling dramatically, with more pressure coming from the Bank of England announcement, gold valued in Sterling is likely to be given an uplift. For how far and for how long, remains to be seen. What I’m convinced of, more now than ever, if the US are intent on more rates rises (which traditionally after a rates rise after recession, more rates rise follow soon after), the US Dollar is going to run away and be overpoweringly dominant. It would not surprise me if a currency correction is in full swing.
Article by Michael Cooper
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Interest Rates Rise to 0.5% – So What Now?
US interest rates have finally been raised to 0.5%. Unsurprisingly, the world hasn’t ceased and the markets are so far so good. When reality hits, as is always the case: you prepare for something that is going to happen always fearing the worst but the worst never actually comes. A bit like climbing with a harness, you never actually fall off the wall but you are thankful it is there all the same. The markets seemingly have followed this rule. So far the gold price has not fallen as commentators had suspected. In Sterling (GBP) and Euros (EUR) the gold price has done the opposite, as currency depreciation against the dollar has buoyed the price in other currencies. Likewise in Dollars, the price of gold has barely moved.
GBP Gold Price
EUR Gold Price
Sterling in 3 months has fallen 1.57 GBP/USD to currently 1.4974. Likewise the Euro has fallen from 1.15 EUR/USD to 1.09 EUR/USD. These currency movements have a definitive impact on the gold price depending on your local denomination.
Yesterday, I was explaining to a client what could happen in 2016 in relation to the gold price in the UK. It is more than likely that the dollar will continue its dominance well into 2016, especially if as time goes by the interest rates rise doesn’t sink the ship. Then it is likely we will see another 0.25 basis move to 0.75% and even an unthinkable 1% before long. If that is the case, the pressure on the gold price in dollars is likely to move hesitantly lower but given the currency battles, even a drop to say $1,040 per oz, the GBP/USD currency price will also shift in the dollar’s favour.
For example a drop of $25 in the gold price to $1,040 combined with a currency movement to 1.47 will mean that gold in sterling, will still be over the £700 confidence line at £707, only 6 pounds lower than it is now. Not exactly eye-watering.
Verdict: – So far the interest rates rise hasn’t sunk us all. No doubt in the coming weeks and months much will be made of any negative financial news that is published. Truthfully, an increase in the interest rates is a good thing. Economies around the world are recovering and we should all return to our light-headed exuberance of pre-recession. That’s of course if you haven ‘t lost faith in the banking system and you accept the ignorant bliss of wilful memory loss, to forget the economic mess we were recently in. My memory however is sharper than ever.
Article by Michael Cooper
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Slim Gold Price Range Ahead of FOMC Meeting Next Week
It is the 11th of December and suddenly it has turned cold and at last it feels like winter. I’m still persevering with my Christmas jumper (a blue cross-stitch endowed with white snowflakes) but I’m having the last laugh; at least I’m warm. The gold price at the moment is doing anything but warming my cockles. It would appear that the Federal Open Market Committee (FOMC) are at last baying to commentators such as myself, who have been writing articles about the eventuality for the last year and a half. Finally they deem we are in a position to raise the interest rate from historic lows of 0.25%. But will they do it? I can’t believe I’m saying this but I actually think they might do it. Finally. I feel a modicum of reprieve but the gratification doesn’t last long as it is now finally time to turn to commodities and what they have been doing and what they might do.
At the moment gold has been trading in a well worn path. In the last two weeks the gold price range was trading $32.1, £16.55 and €33.80 respectively. A macro look at gold will tell you that this size of gold price range has been on-going for the last couple of months and at times has been even more tentative throughout the year. The average in each currency was $1067.77, £708.67 and €994.27 with the mode (the most frequent value) being $1055, £708 or £705 and in Euros it could be four different variants €998, €994, €986 or €977. This suggests a lot more about currency than it does about the rates rise, although everything is inextricably linked in the long term.
The notably slim gold price range combined with other data, all point towards downward pressure on the precious metal markets. Unsurprisingly over the last few days there have been significant outflows from ETFs including large name players such as Schroders, SPDR and Comex Gold Trust. Naturally all this information points towards the FOMC meeting and the interest rates. The market is waiting and these numbers suggest this definitely the case.
With the increase in the interest rates will almost certainly lead to a stronger dollar. The FOMC are all too aware of the dollar’s potential for continuing strength in 2016. Looking forward there is going to be significant pressure on commodities across the board and most significantly on oil. The lower pricing of brent crude oil and the effect that has on the metals market, ultimately means operational costs will fall for extraction and delivery. This will do little to boost the gold price.
In all, I already am coming to my own conclusions on what will happen to the gold price especially after looking at the slim gold price range. But the markets both domestically in the US and further afield, is what I’m most interested in – I’ve already written some scenarios about What Will Happen to Equities & Gold when the interest rates rise. As is often the case in life, you wait for something to happen for so long, when it arrives the ecstasy of that moment is so much duller than you initially thought it would be. 2016 is going to be the year of normalisation and reaction. I for one am looking forward to it.
Article by Michael Cooper
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FOMC Minutes are released: Will the FED raise interest rates in December or is it folly
This has been a long time coming. The FOMC and the FED rates rise is not exactly a surprise or a ‘whodunnit’; no one should be out there wondering anything more than, “When? When are they going to finally do it and put us all out of our misery?”. As much as I and probably anybody else with a passing interest in US/World Economics, will be looking forward to finally coming towards the end of this saga, will they actually do it? What I mean is: will they actually, finally, just get on and raise the interest rates? Or am I likely to have to write or more aptly rewrite an article from earlier this year or even 2014, about what will happen if/when they do it, albeit with a smattering of credible up to date quips and sources? Jury’s out on that front.
What I can update you on is the following. The FOMC minutes for the last meeting were published yesterday at 7pm GMT. For those of you keen on reading the full document – here it is: FOMC Minutes. The minutes were a like for like summary of what has already been widely circulated, December is on or at least could potentially be on. In the minutes, the key bits were as follows:
In summary, the FOMC are keen to raise the interest rate by a basis of 25 points or by 0.25% but they aren’t in a hurry. They are keen to stress and they certainly reference it throughout the minutes that a raising of the interest rates will only be if the market conditions and environment continue to perform strongly and even then the members will have to be fully convinced it is worthwhile “Members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information…before initiating the process of policy normalization.”
Furthermore despite Yellen’s suggestive hawkish tones, the FOMC are keen to keep the wording quite specific and not to cause alarm, “a couple of members expressed concern that this wording change could be misinterpreted as signaling [sic] too strongly the expectation that the target range for the federal funds rate would be increased at the Committee’s next meeting.” Naturally the disclosure of a potential rates rise and then quite openly pointing to a rates rise in press conferences negates any quietly-quietly catchy monkey approach the FOMC intend.
Finally the FOMC minutes drew to a close by summarising what the increase is adjudged on and the range at which a marginal increase could occur: “While members differed in their assessment of the likelihood that incoming information will warrant an increase in the target range for the federal funds rate when the Committee meets in December, they agreed that, in making the decision, the Committee will evaluate progress toward its objectives, taking into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments”.
Verdict:- Albeit for me to be damning of the FOMC Minutes and the committee, for one thing they are in a high pressure position with much of the world watching. Having said that, the process in which the rates rise has been conducted, a never-ending yo-yo, with subsequent reaction by markets has been anything but smooth. The markets now see a higher probability of a rates rise in December and as such have reacted accordingly with major indexes posting big one-day gains. I do have a couple of reservations. Firstly, the FOMC have given themselves ‘a get out of Jail free-card’ – they won’t necessarily raise interest rates until all the members are fully convinced. They also are gambling on the fact that the strength of the dollar doesn’t impede the rest of the world, their main trading partners such as Japan (who have just tumbled back into recession for the fourth time) and US growth; none of these are a dead cert. Secondly, the 25 points basis increase is fairly nominal. My question is, although an interest rates rise gives assurance to investors that the economy is finally back on track – which obviously is a good thing – even for a gold dealer, I wonder why the markets think this is an excellent thing. If bond yields increase, giving guaranteed returns and likewise if cash investments have greater potential for investors, whilst providing a safe-haven, will there not be an exodus from riskier assets such as the stock market in the medium to long term? Lastly, the strength of the dollar is cited frequently in the minutes as a concern. By raising the interest rates sooner than necessary, the dollar is only going to rocket further to the detriment of global trade and trade partners.
I for one am not ruling out a rates rise, I think it is a possibility. But like passengers stranded on the Titanic, the rest of the world will sullenly watch the US disappear into the distance on their empty lifeboat alone, choosing to take no one with them.
Article by Michael Cooper