(Kitco News) – Federal Reserve Chair Jerome Powell put to rest Wednesday all speculation that the central bank will introduce negative interest rates. But Powell’s line in the sand is not expected to spook gold prices, according to analysts at BMO, who see higher prices through the rest of the year.
Colin Hamilton, commodities analyst at BMO Capital Markets, said that unlimited quantitative easing and interest rates holding at the zero-bound target for the foreseeable future should continue to support gold prices.
“Fed has more policy cards up its sleeve, and is more than willing to play them to promote economic recovery,” he said in a note Thursday. “Overall, with the Fed still offering clear support, we see the environment as still supportive of elevated gold prices.”
Growing risks-off sentiment in financial markets is helping to push gold prices higher Thursday. June gold futures last traded at $1,738.20 an ounce, up more than 1% on the day.
Also in the note Douglas Porter, BMO Nesbitt Burns’ chief economist, said that negative interest rates might not actually help stimulate the U.S. economy that grounded to a halt after states closed all nonessential business and asked people to stay home to slow the spread of the virus.
He described negative interest rates as “economic black holes.”
“They have tremendous gravitational pull as you approach them, they distort all manner of physical (and economic) laws as you enter them and they are almost impossible to escape,” he said. “While negative rates cannot be ruled out in the U.S., the BMO view is that they should only be used in an emergency situation where every other option has been deployed, including more QE.”
Last month, as the global economy continued to reel from the effects of the spreading coronavirus, BMO increased its gold forecast for the year. The bank said that it sees gold prices averaging the year around $1,654. For 2021 the analyst see gold prices averaging the year around $1,698.
In Wednesday’s webinar hosted by the Peterson Institute for International Economics, Powell was unambiguous in his rejection of pushing interest rates into negative territory.
“Negative rates is something we are not considering, we have a good tool kit,” he said. “The tools we are using: forward guidance and asset purchases work and that is what we will be using.”
Author: Neils Christensen