Prior to the actual Fed monetary policy statement, gold prices have already been retreating as commodity traders expected the US central bank to push through with its plan to taper asset purchases by $10 billion monthly. Recall that the price of the precious metal already retreated back when the Fed decided to start tapering back in December 2013.
Bear in mind that the reduction of stimulus is considered by most traders as a prelude to actual monetary policy tightening, which then drives up the US dollar’s value. With gold as a hedge to inflation and the US dollar, the price of the commodity thereby fell after the announcement. Yellen also hinted that the Fed might start hiking interest rates around six months after the asset purchase program ends, fueling more dollar demand.
Gold Prices Outlook
Looking back on the gold price action when the Fed started its taper shows that price might have more room to fall in the coming months. The reason why prices recovered around the start of the year was that the US economy printed consecutive months of bleak jobs growth, convincing most market watchers that the Fed could hit the brakes on the taper.
However, Yellen previously dismissed the downturn in the jobs market as merely a result of bleak weather conditions. Although policymakers noted that the US economy is far from achieving full employment, they upgraded growth forecasts for 2015 and 2016. This led several market participants to speculate that a Fed rate hike could take place within the next couple of years.
If these expectations persist and the US economy supports these with strong data, gold prices could continue to decline as traders move their money from the safe-haven commodity to the US dollar. In addition, risk appetite has somewhat weakened recently, causing traders to park their money in the lower-yielding US dollar.
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