Gold futures settled higher on Wednesday, after posting back-to-back declines, then headed lower after the Federal Reserve cut its benchmark interest rate but said it would monitor the economic outlook as it assesses its next decision on rates.
The Federal Reserve cut its benchmark interest rate for the third straight meeting, by a quarter percentage point to between 1.5%-1.75%. The central bank signaled it may pause to see whether these easing steps are enough to sustain the economic expansion.
Following the statement, “I think a December cut is now unlikely and gold should sell off,” said Jeff Wright, executive vice president of GoldMining Inc. The statement was “more hawkish than I anticipated.”
In electronic trading shortly after the Fed news, gold for December delivery GCZ19, -0.25% traded at $1,490.40 an ounce. Before the decision, prices for the contract had climbed $6, or 0.4%, to settle at $1,496.70 an ounce.
Whether or not the Fed cuts again in December “will be dependent upon how the bond market trades in the weeks ahead,” and “if the repo/liquidity crisis eases in the weeks ahead,” said Craig Hemke, precious metals expert and editor of the TF Metals Report.
“I suspect that the bond market will rally (lower rates) on continued weak economic data, and I also suspect that the repo facilities announced two weeks ago will continue to be necessary,” he told MarketWatch. “Therefore, I expect more Fed funds rate cuts, perhaps in December, but multiple times again in 2020.”
“Low rates and negative ‘real’ rates are both very bullish for gold and silver prices in the weeks and months ahead,” he added. “Both metals will finish the year strong and then gold will look to challenge its old all-time high near $1900 by late 2020.”
The yellow metal had briefly trimmed some of earlier gains after data showed third-quarter U.S. gross domestic product expanded at a 1.9% annual pace, slowing from 2% in the second quarter but coming in above the average forecast by economists for growth of 1.6%.
The GDP data had reinforced expectations the Fed will seek to cool expectations for additional rate cuts.
“Looking at the U.S. GDP data, I think it is time for investors to have a reality check,” said Naeem Aslam, chief market analyst at ThinkMarkets, in reaction to the data. “The ultra-easing monetary policy is simply off the table.”
Traders have already scaled back bets for further interest-rate reductions later this year and in 2020.
Fed monetary policy easing is seen as a positive for gold for a variety of reasons, including downward pressure on bond yields, which reduces the opportunity cost of holding non-yielding assets like commodities. Lower interest rates can also put pressure on the U.S. dollar, making gold and other commodities priced in the product less expensive to users of other currencies.
Other metals on Comex settled before the U.S. central bank’s rate decision. January platinum PLF20, -0.61% edged up by 0.6% to $930.60 an ounce, while December palladium PAZ19, +1.23% rose 2.1% to $1,792.10 an ounce.