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US raises interest rates but gold price holds its ground

Thursday, December 17, 2015

The big news this week is that the US Federal Reserve has acted, as was widely predicted, to increase US interest rates by 0.25 per cent. But commentary accompanying the rise suggests that the increase in the cost of borrowing may not impact too harshly on the gold price.

Gold prices traditionally fall when the economy is strong and interest rates are on the up. However, the Fed said that it is now looking at a more gradual increase in rates than it was considering just a few months ago.

The Wall Street Journal (WSJ) said this policy may lead to higher inflation which could “reanimate demand for gold as a store of value”. Slow increases in the cost of borrowing are also expected to push the gold price upwards.

Peter Hug, of Kitco Metals, told the WSJ: “I’d be willing to bet you will not see a rate increase by March, or maybe even until the summer.

“Right now, there is just not enough juice to create a significant barrier to gold.”

The market this week

Ahead of the Fed’s announcement on Wednesday (16 December), the gold spot price jumped by more than one per cent, thanks to speculation that any future rate rises will be gradual. That expectation was confirmed by the Fed’s commentary.

There has been a nine per cent dip in the price of the precious metal during 2015, making it a good year to buy. The falls have been largely due to the expectation, now met, that the Fed would increase rates from the record low they had stood at since 2006.

At 22:30 on Monday (14 December), the gold price stood at its lowest level this week, at £698.84 per troy ounce but had bounced back to £717.38 at 18:00 on Wednesday, just ahead of the Fed’s announcement. The spot price was  £714.74 per troy ounce at 09:00 this morning (Thursday 17 December).

Governments and investors turn to gold

The low gold prices seen this year have encouraged both private investors and international governments to increase their gold holdings.

Worldwide, there was a 27 per cent rise in investments in gold bullion coins and bars during the third quarter of this year among private buyers.

Among the government investors, China has led the way. The world’s biggest gold buyer has been adding liberally to its stocks of the precious metal ahead of its currency, the yuan, being granted reserve currency status by the International Monetary Fund.

Around 2,800 tonnes of gold are produced globally every year, and in just five months, China invested in around a quarter of the world’s annual production. It has been buying between 14 and 20 tonnes of the precious metal each month.

Russia has also been boosting its gold bullion holdings over the course of 2015. In September it snapped by 34.5 tonnes to add to the near 30 tonnes of gold it bought in August, figures from the World Gold Council showed.