Gold Prices To Average Lower This Year As Fed Maintains Interest Rate Hike Outlook

The Federal Reserve raised the target range for the benchmark federal funds rate by 25 basis points yesterday, a move that was widely expected. However, contrary to market expectations of a more hawkish outlook by the Fed, it maintained its December stance of two additional 25 basis point rate hikes over the course of the year. This is likely to translate into a modest short term recovery in gold spot prices, as evidenced by the spike in gold futures prices after the release of the FOMC statement. However, given a strengthening U.S. economy and two more likely rate hikes over the course of the year, we expect gold prices to average lower this year as compared to the levels of last year.

March Rate Hike

The Fed cited improving economic and labor market conditions and strengthening inflation, driven by higher fuel prices, as reasons for the March rate hike. Jobs data for February beat expectations, which meant that the rate hike announced yesterday was widely expected. Tax cuts and lower regulation promised by the President set the stage for higher economic growth and robust jobs growth going forward. However, the positive recent macroeconomic data has not changed the interest rate outlook for the full year 2017. As evidenced by the Fed Dot Plot, which illustrates the outlook on interest rates of members of the Federal Open Market Committee, we are likely to see two more rate hikes over the course of the year, which would take the target range for interest rates to between 1.25% and 1.50% by year end. This forecast is unchanged from the Fed’s stance in December.

Gold prices are negatively impacted by rising interest rates, since gold as an investment yields only capital gains in terms of returns and has no coupon or interest component. Given the March rate hike and the likelihood of two additional rate hikes over the course of 2017 amid strengthening economic conditions in the U.S., we expect gold prices to average lower this year. This is reflected in our realized price forecasts for Newmont Mining, as illustrated by the chart shown below.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Newmont Mining

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