Gold rallied today as investors continue to digest yesterday’s FOMC announcement. The Fed announcement has been heavily anticipated for some time now, and now that it has come and gone, investors may potentially flock back into precious metals.
The Federal Reserve held rates steady this week after their two day meeting. The decision to refrain from hiking interest rates — at least for now — along with some dovish commentary by Fed Chairwoman Janet Yellen drove buying in gold while stocks came under pressure.
The Fed decision has been the subject of speculation for for several weeks now. While just several weeks ago it appeared that the central bank seemingly saw a green light to raise rates for the first time in years, recent volatility seen in equity markets and concern over the health of the Chinese economy likely played a large role in the Fed’s decision to wait. This did not come as a surprise. The Fed did state it still plans on raising rates this year, which would mean a hike is coming in either October or December.
The Fed could potentially, however, change its mind if further equity volatility is seen. On the other hand, if stocks recover and approach past highs once again in the next several weeks it would seemingly give the Fed the “all clear” to raise rates.
Unfortunately, market volatility can increase significantly in the blink of an eye. Markets have been paying very close attention to the Chinese stock market and another severe round of selling could potentially drag global equities down sharply.
A degree of uncertainty has been removed from the marketplace for now and that may potentially fuel further buying in gold and precious metals.
With little economic data due for release next week, gold will likely continue to be driven by interest rate expectations. In addition, technical buying and short-covering may also add fuel to any rally. Gold may, however, run into some significant technical resistance overhead. Some market participants may still look to sell gold on any significant rallies in price and the bulls still have much to prove.
If stocks fall on China, concerns or the notion of rising U.S. rates it could potentially also encourage buying in gold. Stocks have marched higher the last several years with seemingly little to no resistance. This could potentially be about to change. If stocks show further weakness and enter correction or bear market territory, gold may potentially benefit substantially as investors seek to reallocate capital. Should this prove to be the case, gold could see significantly higher prices in the coming months and years.
