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Gold In 'Wait-And-See Mode' After Hawkish Fed - Analysts

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(Kitco News) - Gold could continue to suffer in the short term as Federal Reserve monetary-policy tightening weighs on the market, according to analysts.

Traders are closing the book on what has been a volatile week with prices ending near a three-week low at key. August Comex gold futures are ending its second week of negative losses, last trading at $1,256.10 an ounce, down more than 1% from the previous Friday.

The silver market is also seeing a second consecutive weekly close with prices ending the week back below the key level of 17 an ounce. July Comex silver futures last traded at $16.45 an ounce, down more than 3% from last week.

Despite the weak price action, there also is still some optimism in the marketplace because of lingering doubt that the U.S. central bank can aggressively raise interest rates as the U.S. economic recovery starts to show signs of weakening momentum. 

The same day the Federal Reserve raised interest rates by 25 basis points and surprised markets with a hawkish tilt, markets received economic reports that showed disappointing retail sales and inflation data. Retail sales have disappointed market expectations for four straight months, while the core Consumer Price Index fell to a two-year low.

“Because of the recent data, there is some hesitancy for markets to believe the Federal Reserve outlook,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Hansen said that he thinks the gold market is in “wait-and-see mode” as recession fears refuse to completely disappear.

Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the recently released In Gold We Trust report, agreed that recession risks are growing, citing a flattening of the short end of the yield curve as the spread between 10-year yields and two-year yields narrows. The spread is at its lowest level since August 2016.

“For the time being, the market will believe the Fed’s outlook and gold will suffer,” he said. “Gold will pick up momentum when the market realizes recession fears aren’t going away.”

Fed See’s More Rate Hikes But Markets Don’t

While Chair Janet Yellen said that the Federal Open Market Committee is on track to continue to raise interest rates this year and next, the market is reluctant to raise its expectations.

CME 30-Day Fed fund futures are pricing in a 16% chance of another 25-basis-point hike by September. Markets are pricing in only a 45% chance of a rate hike by the end of December. 

Expectations have risen a bit from the more than one-month lows seen earlier in the week, but still remain below a key threshold. Historically the Federal Reserve has not hiked interest rates when expectations are below 50%.

Along with low interest-rate expectations, Hansen noted that 10-year-note yields are holding near their lowest level since early November. He noted that low bond yields should continue to support gold.

“I think we are entering an area of opportunity for investors to re-establish their gold positions,” he said.

Equity Markets Remain Gold’s Biggest Competition

Although there is still some optimism for gold, the market is not without its risks. Analysts have noted that prices will struggle to break above $1,300 as long as equity markets continue to trade near record levels.

“Right now, I see the biggest opportunity cost for gold are the equity markets. As long as equity prices remain high, gold will struggle,” Stoeferle said.

However, he added that growing recession risks and weak economic data are expected to weigh on equity markets.

Levels to Watch

Gold’s resilience can been seen in the technical charts as the price so far has managed to hold the 200-day moving average, which comes in at $1,250.10 an ounce.

The bears clearly need to achieve a close below support in order to open the door to the bottom side of the recent channel at the $1,230 trendline,” said analysts at iiTrader. “The bulls look to regain the 50-day moving average that comes in at $1,264.20, which will keep the gold cross on track and keep the tape constructive.”

Greg Harmon, founder of Dragonfly Capital, warned that it could be only a matter of time before the 200-day moving average gives; however, he sees strong support around the May lows at $1,220 an ounce.

He added that a break below that level makes $1,200 a major target, which could threaten the market’s long-term uptrend.

“To change the view of the short-term downtrend, we would have to see a firm push above $1,300,” he said.

Hansen said that while there are risks of prices going lower, he remains optimistic on gold as long as prices can hold above $1,190 an ounce.

The Final Say – Listen To the Fed Heads

Next week brings a relatively light U.S. economic calendar; however, there will be a variety of Fed speakers at the start of the week, which could provide further risks to gold if policymakers reiterate Yellen’s hawkish tone.

Speakers next week include New York Fed President William Dudley and Chicago Fed President Charles Evens on Monday. Federal Reserve Governor Stanley Fischer and Dallas Fed President Robert Kaplan will speak Tuesday.

For economic data, markets will receive existing and new home sales numbers for May and preliminary manufacturing data for June.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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