Fed Rate Rise Sees Gold Price Jump $10 as UK and ECB Hold Despite Rising Inflation

Thu, Dec 14, 2017 - 10:11am

Gold prices rose further in London trade Thursday, gaining $20 per ounce from this week's 5-month lows after the US Federal Reserve raised its key interest rate as expected.

After UK inflation came in at a 6-year high of 3.1%, the Bank of England today voted unanimously to hold its key interest rate at a near record-low of 0.5%.

With annual inflation in Germany reaching 1.8% in its strongest year since 2012, the European Central Bank then said it's keeping deposit rates at minus 0.4% for commercial banks, while extending its new quantitative easing asset purchases at a monthly pace of €30 billion per month until at least September 2018.

"Economic conditions will evolve in a manner that will warrant gradual increases in [interest rates]," said the Federal Reserve on Wednesday, taking the overnight Fed Funds rate up a quarter-point to 1.50% at the last major meeting chaired by Janet Yellen before current governor Jerome Powell takes over in February.

On average the US central bank's committee members now foresee interest rates reaching 2.1% in 2018, unchanged from the 2018 forecast they made at the end of last year.

Their 2018 forecast when first raising rates from zero in December 2015, however, was 3.3%.

Gold prices have since rallied over $200 per ounce from what were then 6-year lows, jumping a further $10 after the Fed's latest announcement to trade at $1257 this morning.

Silver also jumped after the Fed decision, rising back above $16 per ounce for the first time in a week.

Read Rosenberg on Tax Bill, Market Valuations, and Monetary Policy

Platinum, in contrast, held flat, heading for its lowest weekly finish since February 2016, as world stock markets fell back following the raft of central-bank announcements.

European government bond prices rose, nudging yields lower as oil and natural gas prices retreated sharply from this week's spike to 2- and 4-year highs respectively.

US Treasury bonds fell in price, edging the yield offered by Washington's 10-year debt back up to 2.37%.

That's still below the yield offered in New Year 2017 when the Fed's key overnight interest rate stood at 0.75%.

On its annual average, the 10-year yield has risen sharply in 2017 to 2.33% from last year's 1.84%.

But it has remained below the level of 2008-2011 (when the Fed moved to zero interest rates and conducted trillion of QE bond purchases) and also below 2013-2014 (when the Fed discussed and then began 'tapering' QE ahead of finally raising interest rates from zero in December 2015).

Betting on Fed funds futures contracts now sees no change until an evens chance of a rise in March to a ceiling of 1.75%.

The bulk of longer-dated bets see that the Fed then holding at that level until a rise to 2.00% or above in September 2018.

About the Author

Head of Research
twocents [at] bullionvault [dot] com ()