When Lights Go Off, What Does Gold Do?

Will that happen? As Richard Clarida and Mary Dole add their dots for the first time, the plot may change, indeed. Trump exert some pressure on Powell & Company. The US housing market has recently slowed down, possibly in reaction to rising interest rates. The stock market tumbled again this week, with Dow Jones falling sharply (see the chart below), after the arrest of the CFO of Huawei. So, the Fed officials may soften their views.

Chart 1: Dow Jones over the last ten days.

Dow Jones over the last ten days

However, the macroeconomic picture still supports the hawkish case. Inflation is at the 2-percent target. And the recent Beige Book reported that wage growth tended to the higher side of a modest to moderate pace in most Fed’s districts. Rising wages could lead the Fed officials more worried about the future inflation. Moreover, the labor market is beyond several estimates of full employment and companies complain on the shortage of qualified workers. In such environment, the FOMC members may be not comfortable turning more dovish.

Implications for Gold

What does it all mean for the gold market? Well, it depends on what will emerge from the darkness through which Powell and his colleagues try to maneuver. We believe that the US economy will continue its expansion in 2019, so the Fed will not drop its policy of gradual tightening of monetary policy. We expect that the status quo will remain with us, so gold should stay within its sideway trend.

However, when it reaches its bottom, it could start to rally later next year, as the macroeconomic picture could become more friendly for the precious metals. Even when the Fed will hike interest rates three times in 2019, it will mean a slowdown in the pace of normalization. So, tightening is exhausting its potential. At the same time, fiscal accommodation should run low, which imply more neutral policy mix. It should mean somewhat less strong US dollar, which would support the yellow metal in the future

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