SINGAPORE: The Federal Reserve will probably raise interest rates in December and follow that with a further 100 basis points of increases over 2016, according to Goldman Sachs Group Inc, which said the shift in US monetary policy will hurt gold.
“The Fed’s rationale for wanting to start the normalisation process is straightforward,” analysts including Jeffrey Currie said in a report. “In their view, labour-market slack has diminished substantially, the link between slack and inflation is stronger than widely believed, and the funds rate is far below the longer-term equilibrium rate, so they need to get started well before the economy is back to normal.”
Bullion was forecast to retreat to US$1,100 an ounce in three months, US$1,050 in six months and US$1,000 in a year, according to the report, which was dated Oct 21 and received yesterday.
Gold fluctuated this year as investors sought to gauge the likelihood of the first US rate increase since 2006, with prices gaining to the highest in more than three months last week amid speculation that the chances of a rise were diminishing.
Goldman put the odds of a move in December at about 60%, seeing a 25 basis point rise. That is higher than the 32% probability seen by investors, according to futures data compiled by Bloomberg. Higher rates hurt gold’s appeal.
“The low market-implied probability of a December hike of only 30% to 40% probably reflects a mixture of concerns about the data, which we find reasonable, and a belief among some market participants that the FOMC (Federal Open Market Committee) will find an ‘excuse’ to stay on hold even if the economy does fine, which we find unreasonable,” Goldman said.
The outlook from Goldman is similar to expectations from Barnabas Gan at Singapore-based Oversea-Chinese Banking Corp, ranked by Bloomberg as the top gold forecaster in the third quarter. Gan predicts bullion will fall to US$1,050 based on the Fed tightening this year. If that doesn’t happen, Gan said prices may climb
Fed officials last month kept rates near zero amid growing risks to their outlook, due primarily to slower growth in China.
Chair Janet Yellen, vice chairman Stanley Fischer and other officials, including John Williams, have since said they still expect a rise this year, though governors Lael Brainard and Daniel Tarullo have argued for patience. Policy makers meet again next week and in December.
While the bank’s base case remained for higher real rates and lower gold prices, there were significant risks that the forecast for weaker bullion may be pushed out should the Fed remain on hold in December, Goldman said. Bullion fell 1.4% last year, extending a 28% drop in 2013 as the US economy recovered, equities climbed and investor holdings sank. — Bloomberg