Dear PGM Capital, blog readers,
In this weekend blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 13, 2017:
- The FED increased interest rate to 1 percent on March 15, 2017
- Gold price surged back over its 50 and 100 day moving average
FED RAISED INTEREST RATE TO 1 PERCENT:
On Wednesday, March 15, at the end of its two day FOMC meeting the Federal Reserve, as expected hiked US interest rates by another 25 basis points in its third upward move since the financial crisis.
The policymakers are now targeting an overnight interest rate between 0.75 percent and 1percent.
Ms. Janet Yellen, chair of the Fed’s board of governors, said the USA economy is on a healthy footing as unemployment is falling, and so rates need to go up to limit rising inflation. She expects the central bank to increase rates twice more this year and stressed that the rate rises will be gradual and signaled in advance.
In a statement she said:
“Waiting too long to scale back some accommodation could potentially require us to raise rates rapidly some time down the road which in turn could risk disrupting financial markets and pushing the economy into recession,”
Below chart shows the Fed Fund target rate since 1977
GOLD PRICE BACK ABOVE ITS 50 and 100 DAY MOVING AVERAGE:
Immediately following the Fed’s announcement that they were raising interest rates a quarter point on March 15, both gold and silver shot up higher with the yellow metal gaining approx. US$ 25,00 per Troy Ounce or 2 percent in the week as can be seen from below chart.
The gold price was expected to react badly yesterday after Federal Reserve officials voted to increase interest rates, as gold does not offer an income and so losing out to yield-bearing assets, it tends to fall during periods of rising interest rates.
PGM CAPITAL ANALYSIS & COMMENTS:
The FED rate hike:
In the past the FED has cited low inflation as one of its main concerns, which had made more inflation its central objective.
As can be seen from below chart, inflation is close to reaching the 2 percent level the FED regards as healthy.
Based on this the FED said on Wednesday that it was now focused on stabilizing inflation.
Ms. Yellen took the opportunity to note that inflation may now rise a bit above 2 percent, just as it has been below 2 percent the last few years.
In a statement she said;
“It’s a reminder 2 percent is not a ceiling on inflation, It’s a target.”
Gold Price above 50 and 100 S.M.A.:
As gold does not offer an income and so losing out to yield-bearing assets, it tends to fall during periods of rising interest rates. Increasing rates also usually boost the US dollar, against which the metal is typically held as a hedge.
But in the event, the gold price, which had retreated in the past couple of weeks ahead of the policy announcement, rebounded strongly overnight, spiking from around US$1,200 an ounce to close to the week at U$1,229.02 and above the technical important 50 and 100-day simple moving averages as can be seen from below chart.
The sharp rise of the price of Gold and its break trough on the upside from its 50 and 100-day S.M.A, can be explained by the fact that the possibilities of only two rate hike this year, may not be enough to keep pace with rising inflation, which will keep “real” interest rates negative, and that is good for gold.
Until Next week
Yours sincerely
Eric Panneflek