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Fedís interest rate decision due: what will it mean for gold?

Wednesday, December 16, 2015

The gold spot price traditionally falls when rates rise, as higher rates are indicators of a growing economy and investors tend to turn away from the security of gold and put their money into less stable assets.

The widespread expectation of a rate rise in the US has led to a depressed gold price in recent weeks. It fell from £713.32 per troy ounce at 15:00 on Wednesday 9 December, to £700.93 at 14:00 yesterday (Tuesday 15 December). The price per troy ounce had recovered slightly and stood at £708.29 at 11:45 this morning.

However, despite the traditional downturn in the gold price when rates rise, not all analysts are convinced the market will follow the usual pattern. Two weeks ago, when the US government published better than expected employment statistics, gold surprised the market by rising in price.

Many analysts also believe that because traders almost unanimously expect the Fed to increase rates, the current gold price has already taken that into account. In addition, the effects of any rate rise on the value of the US dollar will also have a part to play in the value of gold. Traditionally, when the dollar is weak, gold prices are strong and vice-versa; the US currency has recently been enjoying eight-year highs.

Julian Phillips of GoldForecaster, told MarketWatch: “Dealers and speculators are trying to second-guess what the market's reaction to the expected Fed rate hike on Wednesday will be and are reading the price, in line with the technical picture, as downwards.

“But such plays are high-risk ones, for if the Fed does not affect the dollar exchange rate they will have to unwind their positions in the face of a market going the other way.”

The Fed’s announcement on interest rates is expected at 18:00 GMT.