On Tuesday, the Bank of Japan released its most recent monetary policy statement. How could it affect the gold market?

The Bank of Japan held its December monetary policy meeting this week. The BoJ revised its economic outlook up, arguing that “Japan’s economy is likely to turn to a moderate expansion”. The upgraded assessment should be positive for the gold market as it should strengthen the yen against the greenback. However, the BoJ left its policy unchanged. As was widely expected, there has been little reaction to the statement, especially given that trading is muted ahead of the holidays.

Moreover, even though the BoJ held fire on Tuesday, the Fed raised interest rates last week. It means that the divergence between the monetary policies of these two central banks widened, which put pressure on the appreciation of the U.S. dollar against the yen. Additionally, investors should not forget that the reason for waiting was the rise in the Japanese bond yields following Trump’s victory in U.S. presidential election and gains in global yields. And Governor Kuroda said at the press conference that “current exchange-rate moves can be described more as dollar strengthening rather than yen weakening”, signaling that the BoJ is fine with the falling yen.

What does it all mean for the gold market? Well, the recent BoJ actions suggest that the bank will most likely adopt a “wait-and-see” stance as the appreciation of the U.S. dollar works in favor of the BoJ. It is not good news for the gold market as the price of the yellow metal rose in the first half of the year on the BoJ’s expansionary actions. And until there is a sustained rise in inflation, the BoJ should not tighten its policy. Hence, the Fed tightening combined with the BoJ holding back will strengthen the U.S. dollar, which would be negative for gold.

Summing up, the Bank of Japan kept monetary policy on hold in December. It suggests that both yen and gold may be under downward pressure following Trump’s victory and the Fed’s hawkish stance. Surely, there may some correction in the U.S. dollar on the way due to its recent impressive appreciation, but it does not mean that gold has bottomed out yet. The relative tightening of the U.S. monetary policy compared to BoJ and the ECB are bullish for the greenback and real interest rates, which is a fundamentally negative factor driving the price of gold in the long term.

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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.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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