Gold Prices Rise on Fed Rate Decision and Trade Tensions

Gold prices were optimistic on Thursday, as the Federal Reserve’s policy rate decision weighed on the US dollar and as trade fears over tariff imports grew.

Gold futures for the April contract gained 0.5 percent to $1,328.50 per troy ounce.

Spot gold on the other hand, was trading 0.2 percent lower to $1,328.46 per ounce, after hitting a two-week high of $1,336.59 on Wednesday, and also recorded their largest single-day percentage gain since May 17 last year.

Federal Reserve Hikes Rates

The Federal Open Market Committee (FOMC) decided on Wednesday to hike interest rates by 25 basis points from 1.5 percent to 1.75 percent as widely expected by investors.

The central bank has also maintained its forecast of two additional rate increases for 2018, but adjusted its estimated benchmark rate in 2019 to 2.9 percent.

The Fed has been gradually raising interest rates since 2015, distancing the US from extremely low levels placed in after the financial crisis.

US economic growth projection for this year was also lifted from 2.5 percent in December to 2.7 percent.

Policymakers had expected the Fed to indicate three or four more rate hikes for 2018, therefore making its decision to only have two more raises less hawkish than anticipated.

Inflation has continued to hinder the bank’s 2 percent target rate as well, but analysts expect wages and prices to grow in 2018.  

Head of research Alasdair Macleod said the FOMC statement was more dovish than they expected, and that the Fed will have to grasp the nettle, but the risk is that it might create a credit crunch. Macleod added that these were good conditions for gold, since the the dollar is likely to fall.    

Following the bank’s announcement, the US dollar index, which measures the greenback’s strength against six other major peers, was up by 0.1 percent to $89.41.

Trump to Announce New Chinese Import Tariffs

US President Donald Trump is set to announce up to $60 billion in new tariffs on Chinese imports later in the day, which is expected to strengthen the gold further.

Asia-Pacific trading head Stephen Innes said if the significant near-term geopolitical issues and the uncertain equity market fallout are factored in from the worsening of a trade war with China, the precious metal has to be mainstay element in any investment portfolio.

There was no hint with regards to the size and scope of the tariffs, which U.S. Trade Representative Robert Lighthizer stated would be aimed at the country’s technology sector and may also include limitations on Chinese investments in the US.  

The Trump administration earlier this month had already implemented 25 percent and 10 percent tariffs on US steel and aluminum imports respectively.

China has said it would carry out retaliatory actions on US agricultural exports, if the $60 billion tariffs were declared.

Investors feared that retaliation from major US trade partners would have a negative impact on the outlook for global economic growth.

Fed chairman Jerome Powell also warned about the growing trade tensions, saying some Fed members were concerned over a potential global trade war, as they were seeing it as a risk to the outlook.

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