An increase in the Fed’s interest rate drives investors away from gold and towards assets with a return, as the precious metal bears no interest.
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“There is a bit of a disconnect and the market is telling the Fed that they don’t really believe there will be rate hike this year, which explains why the dollar is slightly weaker from last week”, said Bernard Aw, a strategist at IG Asia Pte in Singapore.
LONDON – Gold hit a three-month high on Wednesday, extending gains for a fourth session, as concerns over deflationary pressures in China fuelled expectations the US Federal Reserve will hold off raising United States interest rates, pressuring stocks and the dollar.
Federal Reserve Bank of Chicago President Charles Evans repeated Monday a speech from Friday arguing in favor a very slow course of central bank interest rate rises, but didn’t rule out voting for a rate increase this year.
“The idea in the market that the Fed will lift interest rates this year is out of the market”, LBBW analyst Thorsten Proettel said. This is the first time that any Fed member has taken such strong anti-rate hike stance.
While the USA economy has proved “reassuringly resilient”, Brainard says the economic momentum may not be strong enough to overcome deflationary risks from overseas. That expectation assumed continued solid economic growth and further improvement in the labor market, he added.
The pickup in sales at retailers like Chow Tai Fook has come partly due to consumers taking advantage of previously low gold prices, which were hovering just above a five-year low in late July.
One of the contributing factors was a desire to have more time to appraise recent developments in the global economy, he said, pointing especially to developments originating in the Chinese economy.
On the other hand, over the week end, FED’s vice president Stanley Fischer reiterated similar view of Chair Yellen, that a rate hike by end 2015 to be likely.
Except that’s not been the case for the US economy.
“If the conditions develop that we are required to not move in that period, there will be participants in the market who are financially disappointed by that decision”, he said. The Minneapolis Fed again voted to cut the rate to 0.5 percent.
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“I think October is a live meeting, clearly there is the potential that the data coming in, in advance of the October meeting will be sufficient we have a lot more in December”, Lockhart said in Orlando, Florida.
