Gold Price Expected to Fall

Morningstar equity analyst Kristoffer Inton says the Federal Reserve raising interest rates does not impact the outlook for the precious metal

Morningstar Equity Analysts 25 June, 2018 | 2:44PM
Facebook Twitter LinkedIn

gold precious metal commodity natural resources

At its June meeting, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points, to 1.75%-2%. In addition, the majority of officials at the central bank now expect four rate hikes in 2018, whereas at the March meeting they were evenly split between three and four hikes.

The June rate increase was largely expected by the market, as options prices implied a more than 91% probability before the announcement. The market also appears largely unfazed by an additional rate hike this year, as gold prices remained largely flat.

This rate hike doesn’t change our view that the investment case for gold will weaken. We continue to expect the gold price to fall to $1,225 per ounce by the end of 2018 as the rising nominal interest rate environment increases the opportunity cost of holding gold. Additionally, although the recent rise in inflation bodes well for gold, we think that higher inflation will only spur a more rapid pace of rate hikes. As a result, our fair value estimates and economic moat ratings for all the gold miners we cover remain intact.

Most committee members continue to anticipate the federal-funds rate rising to around 3% longer term. Furthermore, despite continued weakness in inflation in the near term, the committee continues to expect long-run inflation of about 2%. As a result, the case for gold as an investment should remain weak in the longer term.

As investment demand falls, we expect that Chinese and Indian jewellery demand will fill the gap over the long term. However, the rise of consumer demand will take time, while investment demand can change rapidly, which means significant risk to gold prices in the near term.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.