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Updated 17:16 18/11/17

US interest rates to rise sooner rather than later?

24 Oct 2017 By Steve Ward

Thirty years ago,  Black Monday was the biggest stock market fall since the crash of 1929. It began in Far Eastern markets and was exacerbated by the use of programmed trading mechanisms. By the end of October some markets had seen falls of 45.5%. After initially soaring to £365 an ounce, gold then fell to £351, as investors sold whatever they could lay their hands on to raise funds.

By 10.30am,  October 24th, the gold price had £969.96 an ounce. Earlier, Gold prices dropped and hit its lowest in over two weeks. The drop comes amid hopes that some elements of the so-called 'Trump trade' may yet come to fruition. This is on the back of signs that tax reform legislation will be passed this year, as the US Senate adopted a 2018 budget resolution which could also enable the US President’s much heralded tax cut plans.

This current low is just 6% down on the price a year ago. Despite the strength of the US dollar today, the current gold price represents an increase of over £200 - 20% - an ounce during the last 3 years. This reinforces the current investment wisdom that physical gold is a long term store of value that continues to be real wealth in your hands. Diversifying your portfolio with 5-10% of gold is recommended by many investment experts.

Financial news is now focused on President Trump’s choice of Federal Reserve Governors. Trump is expected to make a final decision before 3rd November. Current Chair Janet Yellen's term expires in February. The Central Bank's top job will be hugely influential on the future direction of US financial policy, particularly the expected hike in interest rates, which many investors believe directly impacts on gold prices - high interest rates strengthening the dollar and pushing down gold. At present the front runners for the Chair of Governors are Jerome Powell and Stanford University economist John Taylor. Though, with the topsy turvy nature of US administration, the President may still surprise everyone in his final choice. Powell is considered less hawkish than Taylor who has been consistently advocating higher interest rates. Others in the running are current Chair Janet Yellen, not a Republican favourite, Kevin Warsh, a former Morgan Stanley banker, often attacked as a Washington insider and Gary Cohn, who cut his chances of appointment by criticising the President's comments on the Charlottesville violence.

Even before Trump makes his decision, based on previous statements from current Chair, Janet Yellen, the general feeling is a rise in US interest rates will come sooner rather than later. Early this year Yellen indicated that a 2% inflation should be the trigger for higher interest rates. On Sunday at the Group of Thirty’s Annual International Banking Seminar in Washington she said, 'My best guess is that these soft readings will not persist, and with the ongoing strengthening of labour markets, I expect inflation to move higher next year.' She went on to say to the group, that included Bank of Japan Governor Haruhiko Kuroda, People’s Bank of China Governor Zhou Xiaochuan and European Central Bank Vice President Vitor Constancio, 'We continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labour market and stabilize inflation around our 2% longer-run objective.'

Last week the US Dollar was the best performing major currency, gaining the most against two currencies facing political change, the Japanese Yen and the New Zealand Dollar.

According to Yuichi Ikemizu at ICBC Standard Bank in Tokyo the gold price is '…just really because of the dollar strength,' and went on, 'there's no news on North Korea this past week or so. If some news comes out, gold might be supported but at the moment people are just watching the dollar.'

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