Year-end rate hike once again proves to be launchpad for gold price

– FOMC follows through on much anticipated rate-hike of 0.25%

– Spot gold responds by heading for biggest gain in three weeks, rising by over 1%

– Final meeting for Federal Reserve Chair Janet Yellen

– Yellen does not expect Trump’s tax-cut package to result in significant, strong growth for US economy

– No concern for bitcoin which ‘plays a very small role in the payment system’

There were few surprises yesterday when the Federal Reserve decided to hike rates for the third time this year, by 0.25% to 1.5%. Gold responded with a climb of over 1%.

The statement accompanying the announcement was cautiously optimistic. Two FOMC members dissented whilst Yellen gave comments on Trump’s much lauded tax package and bitcoin.

This was Yellen’s last FOMC announcement as Federal Reserve Chair. As has become her style she was communicative of the Fed’s upcoming plans in terms of normalising monetary policy and the three rate hikes intended for 2018.

Overall Yellen and co are feeling good about how the current Chair is leaving things:

“…the committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers and rising wages,”

However concern and perhaps surprise was expressed when inflation data came in lower than expected. The reading of 1.7% in the year to November did not hold back the FOMC from increasing their growth projection from 2.1% to 2.5% for 2018.

Gold, defying expectations?

Gold is generally expected to stumble when a rate-hike is announced, or at least do nothing at all given how far in advance these things are telegraphed to the market these days. Once again however gold went against conventional opinion and popped up.

In the aftermath of the announcement gold was the biggest gainer whilst dollar stopped its longest winning streak since 2016.  Meanwhile bitcoin tumbled as gold surged on ahead.

Gold’s performance shouldn’t really come as much surprise. In the last two years a Federal Reserve rate hike has proven to be something of a launchpad for the price of gold.  We have frequently seen double-digit percentage increases in gold prices following an increase in interest rates.

This may well be down not to the decision to hike up rates but the language that surrounded it. Often rate hikes come with a hawkish tone, warning of risks to the economy. Instead this latest one was optimistic with some caution. The FOMC, despite boosting economic growth forecasts, has expressed confusion over the stubbornly low inflation rates and therefore, given itself plenty of room for manoeuvring around rate hikes.

Gold investors be warned, a rate hike is not likely to be bad news for the yellow metal for some time to come.

Naive to ignore bitcoin bubble?

Bitcoin’s rise this year (currently at around $17,000) has grabbed the attention of many. It has almost been promoted to ‘acceptable’ status thanks to the launch of bitcoin futures and Wall Street’s apparent enthusiasm for it.

One area where it is hoped that it will quietly go away is at the Federal Reserve. When Powell was questioned about the impact of bitcoin, at his confirmation hearing, he responded that it just wasn’t big enough right now.

Yellen was asked about it once again yesterday. She called the cryptocurrency (which has a market cap of $300 billion) a “highly speculative asset” and “not a stable store of value.”

What both Yellen and Powell seem to be missing is that bitcoin, like gold, is proving to be a measure for how people feel about the state of fiat currencies and the economy. For sure it is mainly a speculative asset at present, but it still making a significant contribution to the commentary regarding the sentiment in the econo