Gold has an interesting relationship with the U.S Federal Reserve – we all know the Fed has huge gold reserves. However, the relationship between the Fed and gold extends beyond the huge stockpiles of gold that the Fed hoards. The fed often wields the power to determine the trading price of gold and you can record massive gains or huge losses on your gold investments depending on what the fed does at any point.

When the fed sneezes gold catches a cold and smart investors know the importance of paying attention to the Fed's economic policy. Last week, Federal Reserve policymakers embarked on a two-day meeting that started on Tuesday. Rumors flitted out that the Fed might decide to raise interest rates after the policy meeting and that was enough to precipitate a selloff in gold.

It is a well known fact that many investors seek stability in gold as a refuge in uncertain economic times. However, many of these investors tend to run out of their gold investments as soon as they perceive that the economic policy might favor interest-yielding assets. Hence, it wasn't surprising that the yellow metal recorded a fear-induced selloff earlier last week on Monday and Tuesday.

Rumors of a rate hike triggered selloff in gold

Many people had expected the Fed to raise interest rates (or last least give an indication that it would raise interest rates) after its policy meeting that ended on Wednesday. Many investors started to sell their positions in gold in order to take profits off the table and the outflow of funds in gold miners ETFs stood at $470.4M in the first two weeks of March to erase the inflows of $159M that was recorded in the ETF in January and February.

On Tuesday, Macquarie analyst Matthew Turner opined that “one difference from a few weeks ago is that the surprise (from the Fed) would be a rate hike, whereas perhaps a few weeks ago people thought a surprise would be a rate cut. There has been a shift towards hawkishness again, which is probably pressuring gold a little bit.” An Oppenheimer analyst, Ari Wald explicitly said, "it's time to take profits in gold".
However, some gold bulls were unshaken in their belief in the fundamentals that support an uptrend in gold. Analysts at UBS noted that they "expect the downside to be ultimately contained amid signs that longs have more endurance and indications of lurking interest to buy dips.” More so, analysts at Global Intergold noted that "gold remains constant in a way that few, if any commodities can compare. It is a unique product that does not lose long-term value."

Fed defy expectations to give gold a boost

However, the fed moved in contrast to expectations by preaching caution in a statement that indicated that the Fed doesn’t want to spook the markets. Fed Chairwoman Janet Yellen noted that “caution is appropriate” because “information received since the Federal Open Market Committee met in January suggests economic activity has been expanding at a moderate pace despite global economic and financial developments in recent months.”

The fed went ahead to reduce the expected rate hike from four quarter-point increases this year to two quarter-point increases by the end of the year.

Gold prices immediately recovered from the slumber after it became obvious that the Fed wasn't going to raise interest rates any time soon. On Thursday, gold spot gold was up 0.3% to $1,266.01 an ounce, gold for April delivery climbed by 2.9% to $1,266.30 per troy ounce and the May contract gained a massive 4.2%.

Gold recovered some of the losses it recorded earlier last week and the yellow metal is on track to end this week with gains. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, saw a 1.50% increase in its holdings from 795.20 tons on Wednesday to 807.09 tons on Thursday. Mitsubishi Corp analyst Jonathan Butler confirms the bullish outlook for the bullion by saying, "with the dovish overall macro outlook - the Fed's more dovish stance and ECB and Bank of Japan also pursuing very aggressive stimulus policies - affecting the strength of the dollar and U.S. Treasury yields, gold should benefit."

By Nicholas Kitonyi

Copyright © 2015 Nicholas Kitonyi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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