Gold edged back towards the previous day’s two-month low on Thursday, but remained hemmed into its recent narrow range after minutes from the U.S. Federal Reserve’s latest monetary policy meeting showed no consensus on the likely pace of interest rate hikes. While the minutes failed to provide a clear outlook for further rate hikes investors are not convinced that the Fed will hold off on tightening its monetary policy, despite a soft inflation picture. The bank plans to start reducing the size of its $4.2 trillion portfolio of bonds and other securities later this year. Spot gold was down 0.2% at $1,224.21 an ounce, while U.S. gold futures for August delivery were up $2.10 an ounce at $1,223.80. Spot prices hit $1,217.14 an ounce on Wednesday, their weakest since May 10 and, the dollar has firmed and kept a cap on how far gold prices can go. The Fed’s comments and heightening tensions arising out of North Korea have helped gold prices to come up from Wednesday’s lows. The Fed is worried about soft inflation readings – no surprise there, and that will stay their hand on lifting rates for now. The critical factor for gold will be any future Fed announcement regarding scaling back reinvesting in maturing bonds, that could lead to a mini-‘taper tantrum’ which means a less favorable real rate environment for gold.
The details of the June 13-14 meeting, at which the Fed voted to raise interest rates, also showed several officials wanted to announce a start to the process of reducing the Fed’s large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year. Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors. However, several participants expressed concern that progress might have slowed and that the recent softness in inflation might persist.
Historical gold prices; (Source: Thomson Reuters)
Last month’s 8-1 vote to lift the benchmark interest rate another quarter percentage point, its second this year, signaled the Fed’s confidence in a growing U.S. economy and the eventual inflationary effects of low unemployment. Fed Chair Janet Yellen described a recent decline in U.S inflation as temporary and the central bank kept its forecast of one more rate rise this year and three the next. The Fed’s preferred measure of underlying inflation slipped again in May to 1.4%, and has run below target for more than five years.
The United States cautioned it was ready to use force if need be to stop North Korea’s nuclear missile program but said it preferred global diplomatic action against Pyongyang for defying world powers by test launching a ballistic missile that could hit Alaska. Investors were also eyeing a slew of U.S. data due later on Thursday including the ADP employment report, ISM non-manufacturing PMI and weekly jobless claims for trading cues ahead of Friday’s nonfarm payroll figures.
U.S historical GDP
Tensions with U.S.
The United States has remained technically at war with North Korea since the 1950-53 Korean conflict ended in an armistice rather than a peace treaty and the past six decades have been punctuated by periodic rises in antagonism and rhetoric that have always stopped short of a resumption of active hostilities. Tensions have risen sharply after North Korea conducted two nuclear weapons tests last year and carried out a steady stream of ballistic missile tests. North Korean leader Kim Jong Un said the ICBM (Intercontinental Ballistic Missile) test completed his country’s strategic weapons capability that includes atomic and hydrogen bombs. U.S. Ambassador to the United Nations Nikki Haley told a meeting of the U.N. Security Council that North Korea’s actions were “quickly closing off the possibility of a diplomatic solution” and the United States was prepared to defend itself and its allies.
Trump and other leaders from the Group of 20 nations meeting in Germany this week are due to discuss steps to rein in North Korea’s weapons program, which it has pursued in defiance of Security Council sanctions. The U.S. military assured Americans that it can defend the United States against a North Korean ICBM. Taking a major step in its missile program, North Korea on Tuesday test launched an intercontinental ballistic missile that some experts believe has the range to reach the U.S. states of Alaska and Hawaii and perhaps the U.S. Pacific Northwest.
North Korea’s missile test; (Source: Thomson Reuters)
Moreover, any interest rate hike by the Federal Reserve in the current scenario as the geopolitical concerns are escalating, and an aggressive response by the U.S. against North Korea could drive gold prices higher as the investors are likely to turn to the safe haven asset from risky assets.
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