Investment Clock insights

Fed policy not supportive of extended bull market in gold

Trevor Greetham

19 September 2016

The gold price is up 25% year to date in dollar terms and 40% if measured against the devalued pound (chart 1). However, a constructive view on the US and UK economies means we don’t see this as the start of a long bull market.

Gold tends to do well when the dollar is weak and when long-term interest rates are falling (charts 2 and 3). Recent economic data out of the US has been on the soft side, so we wouldn’t be surprised to see a weaker dollar and low rates give gold another short term boost, especially if the US Federal Reserve (Fed) decides not to hike rates at its policy meeting this week.

Looking further out we’d be more pessimistic on gold because we’re more optimistic on the US economy and we expect US interest rates to rise. With monetary policy still easing in Europe and Japan and China guiding its currency lower, we see upside in the dollar versus the currencies of its main trading partners over the next few years. We’d also expect long-term interest rates to rise in real terms as monetary policy returns to normal and this will further dampen the attractions of gold.

A tactical holding might still be worthwhile to a sterling-based investor expecting another large move downward in the pound on the foreign exchanges. However, the UK economy is showing a lot of resilience to the Brexit shock and, while sterling weakness is a deliberate part of the policy mix, we don’t expect June’s dramatic plunge to be repeated.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.