May RBA Meeting And Gold

Last week, the Reserve Bank of Australia cut its main interest rate by 25 basis points. What does it imply for the gold market?

We usually focus on monetary policy decisions made by major central banks in the world: the Fed, the ECB and the Bank of Japan. However, we also try to cover the most important moves undertaken by other globally important central banks (forex investors should be particularly interested in their actions), such as the Swiss National Bank, the Bank of England, the Bank of Canada, the Reserve Bank of New Zealand and the Reserve Bank of Australia.

The latter cut its official cash rate by 25 basis points to 1.75 percent last week. The current level seems to be quite high when compared to other central banks, however, it is a historic low for Australia. The cut was the first reduction since May 2015 and it signals a continuation of the global and Chinese slowdown (China’s manufacturing activity contracted in April) and subdued inflationary pressure. “Inflation has been quite low for some time and recent data were unexpectedly low”, said Glenn Stevens, the Governor of the RBA, in a statement. Indeed, the RBA’s decision followed the recent data on inflation. The CPI contracted 0.2 percent in the first quarter of 2016 in contrast to a 0.4 percent increase in the fourth quarter of 2015. On an annual basis, the CPI increased 1.4 percent, compared with 1.7 percent at the end of December.

The cut may increase concerns about global growth and spur some safe-haven demand for gold. On the other hand, the RBA’s dovish move has led to a sell-off in the Australian dollar, which plunged more than 1 percent. Therefore, the cut is another factor strengthening the U.S. dollar exchange rate against major currencies. The stronger the greenback, the weaker the yellow metal. Thus, the RBA’s decision is maybe not a major event in the precious metals market, however, it adds to concerns about the global recovery and exerts some upward pressure on the U.S. dollar (especially that investors expect one more rate cut in Australia this year).

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium-term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor