Traders had a change of heart on Monday when they pulled out of gold in favour US-backed equities – ahead of the FOMC meeting on Tuesday and Wednesday. The Federal Reserve Open Market Committee are scheduled for a 2-day meeting where it is expected they will come to some major decisions with regards interest rates.
The Fed has been tapering their stimulus since December 2013, and with strong signs the US economy is gaining momentum there is little reason to believe chairwoman, Janet Yellen and her policymakers will have a change of heart continuing the pullback. This is good news paper assets, but bad news for precious metals – depending which way you look at it.
Consumers had a brief moment to snap up gold at attractive prices when they feel to around the $1250 an ounce last week, but with violence flaring in Iraq, the downward spiral of gold prices came to a sudden end.
The yellow metal looked as though it might get pushed back towards the $1300 dollar psychological threshold after six sessions of straight gains, but surprisingly took a tumble in afternoon trading on Monday – perhaps word of the Feds proposals for increasing interest rates has already leaked on to Wall Street.
Gold prices suffered a further setback on Tuesday morning after some profit taking on Wall Street. The yellow metal has however, recovered somewhat in the following hours and at the time of writing, spot prices are ringing in at $1267.10 per troy ounce.
US economic data
The pullback was in response to lower than expected economic data published by the US government. Inflation was lower than analysts had predicted, and so too housing. Although market watchers had predicted a decline in the housing market, sales were even lower than the anticipated negative forecast.
Consumer prices on the other hand rose sharply, but does not appear to offered great enthusiasm to traders. All eyes are now on what Yellen has to say when the policy makers emerge from the second day of talks in Washington tomorrow. Based on today’s results, it is likely anything will change.
However, according to Bloomberg survey, just of half of economists think the Fed will be hawkish and raise interest rates sooner than investors expect. Earlier this year, Yellen had hinted interest rates could be lifted as early as the first quarter of 2015, whereas many market commentators have suggested the increase will come later in the year.
The Fed has been tight-lipped over the issue for months, which suggests they remain undecided. However, there is a strong chance the policymakers will stick with their original idea and raise interest rate in the early half of next year rather than delaying. With the global economy strengthening unnecessary delays will only invite pressure.
A positive decision from this meeting will be good news for consumers looking to add gold bullion to their investment portfolio as precious metals will lose some immediate value. Keep an eye on the spot charts tomorrow and check out the bullion deals at coininvestdirect.com.