How the Gold Spot Price Will React to the Federal Reserve Meeting This Week

gold spot price

Watch for the gold spot price - the price of gold for immediate delivery - to make dramatic moves as the Federal Open Market Committee (FOMC) meets this week.

Gold has already had a volatile morning ahead of the meeting's Tuesday kickoff.

After closing at $1,303.50 an ounce in the previous trading session in New York on Monday, the 24-hour gold spot price - also known as the "World Gold Price" because it reflects gold trading around the world - hit a one-week high very early Tuesday, reaching nearly $1,312 an ounce. But by midmorning, the gold spot price fell 0.42% ($5.50) to $1,298.90 an ounce.

Futures trading volume on Tuesday morning was 80% above the average for the past 100 days for that time of day, according to data compiled by Bloomberg. U.S. gold futures for August delivery were up 0.15% at $1,305.3 per troy ounce.

There are two big policies to watch coming out of the Fed meeting that will significantly affect gold prices...

Gold Spot Price and the Fed's 2 "I's"

All eyes are on possible changes to interest rates and inflation that could come out of the Fed meeting that will run through Tuesday and Wednesday.

Earlier in July, Fed Chairwoman Janet Yellen said that interest rate increases may come "sooner and be more rapid than currently envisioned" should the labor market improve more quickly than anticipated. The Fed has said it won't consider raising interest rates until the unemployment rate hits a range of 5.2% to 5.6%, and inflation rises to a range of 1.7% to 2%. June's unemployment rate was 6.1%, down from 6.3% in May. On Friday, fresh labor market data is scheduled to come out at 8:30 a.m. EDT.

Interest rates are important for gold investors because higher interest rates are bad news for gold prices. Gold prices will typically weaken when rates go up as investors seek out higher-yielding assets.

"It's tough to say how gold prices will react this week, even if we know exactly what the Fed will say," Money Morning Resource Specialist Peter Krauth said on Monday. "However, with low interest rates that are likely to stay low for some time, the opportunity cost of owning gold is next to zero, making it an attractive asset. I actually expect long term-rates to continue to trend downward for some time."

Meanwhile, inflation has been heating up in the last several months. In May, consumer prices rose at more than a 4% annual pace. Prices for beef, pork, and other foods are soaring. Core inflation - prices less food and energy - after remaining fairly tame for several years, is also accelerating.

The latest U.S. inflation rate data covers the 12 months ended January 2014 (published Feb. 20). The rate was 1.6%, but Americans could be facing inflation greater than 3% or even 4% for the rest of 2014 and 2015.

That would send gold prices - and gold stocks - higher.

Precious metals tend to move in tandem with inflation. As the value of a currency decreases - which is an effect of inflation - the price of precious metals increases. A declining value of a currency means that it takes more of that currency to purchase an ounce of the metal.

Since there is fear of inflation in the United States, and there's also a specific attempt to produce inflation in Europe right now, there is upward pressure on the price of gold.

"While the inflation rate is still relatively low, there are increasing signs of rising inflation," Krauth said. "It's still early in this trend, but once we have a few consecutive quarters of close to 2% inflation, I think the market will start to expect continuing rising inflation, making gold more attractive."

Also playing into gold spot price this week will be the federal government's release of a preliminary estimate of second-quarter GDP - the total value of all goods and services produced by the economy during the last three-month period - on Wednesday. Economists are hoping for a strong recovery to offset the bad Q1, according to FOX Business. In Q1 the economy contracted by 2.9%, marking its worst contraction since the height of the financial crisis.

Mark To, head of research at Hong Kong's Wing Fung Financial Group, predicts the gold spot price will be flat on the week.

"Gold is going to be range-bound until the Fed meeting and economic data later this week," To said to The Economic Times. "Until then, we can see gold holding near $1,300 as that seems to be a strong support level due to the geopolitical tensions."

Money Morning recently delivered for our Members a two-part "cheat sheet" that outlines the right amount of gold for your portfolio. You can get that gold investing guide - for free - here.

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