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Thursday, June 16, 2016 Derek Macpherson

The Fed Speaks; Still Bullish on Gold


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In our post ahead of the FOMC statement, “GOLD BULL IS STARTING TO RUN” we had suggested that following the recent run in the gold price, a very dovish statement was required to keep the gold price at current levels. Where we were wrong, was that we were not expecting a very dovish statement, and in particular that the committee forecasts would suggests rates would be lower for longer, which provided a modest lift for the gold price. Importantly, our long-term view that we are in a new gold bull market remains unchanged and the trajectory of that market may be steeper than originally thought.

 

Why lower rates longer matters for gold. The U.S. Federal Reserve Board’s Federal Open Market Committee (FOMC) statement released yesterday and accompanying data suggests that rates may be lower longer. In our view, this implies that both the U.S. and global economy are weaker than expected and not able to withstanding potential risks (e.g. Brexit vote on June 23rd). This weaker economic, higher risk environment historically favours precious metals and could accelerate the trajectory of this new bull market for precious metals.

 

Market reaction supports our view that we are in a new bull market for gold. Previously, the suggestion that rates would be lower longer, would have had a different market impact, and likely have resulted in U.S. equities increasing. However, the negative reaction of equity market, S&P 500 down 0.18% with gold up, 0.47%, investors appear to be tilted away from general equities towards precious metals. We believe this supports our view that we have started a new bull market in gold.
 
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