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Fed, ECB To Define Gold Prices Near-Term - Analysts

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(Kitco News) -Gold’s near-term outlook is once again in the hands of central bankers as two much anticipated monetary policy meetings will be held next week.

Many analysts have noted that gold has followed a well-established pattern: selling off before an expected rate hike to then rise once the dust has settled. The question on many investor’s minds is whether or not this pattern will hold next week as inflation picks up as the U.S. economy continues to grow at a steady clip.

The market is ending the week in a fairly tight range. August gold futures settled the week at $1,302.70 an ounce, up only 0.26% since last week.

For many analysts, a dovish hike scenario would be the Fed signaling only on more rate hike this year, which would most likely happen in December.

In a recent interview with Kitco News, George Milling-Stanley, head of gold investments at State Street Global Advisors, said that a dovish hike would see gold recapture its lost territory reasonably quickly. He added that he could see gold back between $1,350 and $1,400 an ounce.

“I would expect gold to rebound quite well as soon as the Fed announcement is out of the way,” he said. “This June move has been so well telegraphed that I don’t think it will take longer for the gold market to adjust.”

However, even if the Fed signals only one more rate hike this year, the timing of the next hike will be essential, according to Martin Murenbeeld, president of Murenbeeld & Co. In an interview with Kitco News, he said that if markets price in a September rate hike then gold might only rally $10 for a brief time.

Other analysts are not optimistic that the Fed will embark on a dovish hike. Colin Cieszynski, chief market strategist at SIA Wealth Management Inc., said that rising inflation along with a growing economy will keep the Fed on pace to raise interest rates once a quarter through 2019.

“Right now the Federal Reserve doesn’t have much reason to stop raising rates at this point,” he said.

Bill Baruch, president of Blue Line Futures, said that there are growing risks that the Fed could be hawkish next week as it becomes more empowered to normalize interest rates as the European Central Bank signals that they are moving forward with its plans to tighten monetary policy gradually.

“I think the Fed was hesitant to aggressively hike rates this year as the policy divergence was turning out to be bigger than they wanted. But that is no longer the case,” he said.

Tightening In Tandem

While gold could take a hit following hawkish comments from the Federal Reserve, Baruch said that there is still a chance for gold to rally.

Along with the Federal Reserve, the ECB is holding its monetary policy next week. While the ECB is not expected to tighten rates now, economists expect the central bank President Mario Draghi to set the stage for tighter monetary policy later as it looks to end its bond-purchase program later in the year.

“A hawkish stance from the ECB would strengthen the euro, which would drag down the U.S. dollar and that will ultimately be positive for gold,” said Baruch. “For the gold market, I think there is more upside potential in the euro than there is in the U.S. dollar.”

While there is still strong momentum driving the U.S. dollar, there is a chorus of currency analysts that are warning that the market is overbought and is due for a pullback. 

“We think the USD is more inclined to trade with a weaker tone in line with our rates expectation and ultimately reliant on the ECB meeting a few short hours after,” said currency analysts at TD Securities.

Trade Wars Need To Escalate To Support Gold

While gold could get a boost from volatile currency markets next week, analysts are not expecting to see the market benefit from safe-haven flows.

While there is unprecedented uncertainty among the Group of Seven nations -- the seven most significant economies in the world – with their meeting in Quebec City this weekend, analysts are not expecting to see major fireworks.

The meeting comes as the U.S. continues to fight with Mexico, Canada, and Europe over trade practices. Countries are looking to implement trade tariffs on a variety of U.S. products in retaliation to U.S. steel and aluminum tariffs.

While a potential trade war creates some geopolitical tension, analysts say that it isn’t enough to push gold prices higher. Murenbeeld noted that trade has to significantly weaken the U.S. economy to force the Federal Reserve from raising interest rates. He added that the crisis isn’t at that point yet.

Cieszynski agreed that the trade issues aren’t bad enough to shake the U.S. economy, which will keep a lid on safe-haven assets.

“There is just so much momentum in the U.S. economy that it could easily survive these trade disputes,” he said.

Following the G7 meeting, U.S. President Donald Trump will head to Singapore for a historic Summit with North Korean Leader Kim-Jung Un.

While not much is expected to come out of this meeting, analysts say that event is another example of easing global geopolitical tensions.

How To Play Gold Next Week

Because of gold’s potential next week, Baruch said that he sees two strategies that could be potential winners. He added that the key is for investors to control their risks, which is why he prefers to play gold through the options market.

He added that he likes the idea of buying short-term calls or using an August call spread. He said that investors can find good value in buying August $1,320 calls and at the same time sell $1,350 calls.

He also likes buying July $1,320 calls to play the potential spike in gold following the Fed and ECB rate hikes.

“Through options, your risks are defined, but you have significant upside potential,” he said.

Phillip Streible, senior market analyst at RJO Futures, said that he is bullish on gold next week and could see prices pushing to $1,320 an ounce following the Fed meeting.

The Final Say…

While geopolitics and central bank meetings will be in the spotlight next week, there are other major economic events that investors need to focus on.

On Tuesday markets will receive important inflation data with the release of May’s Consumer Price Index. Rising inflation, while supportive for gold, could be detrimental as it will also support higher interest rates.

As the ECB holds its press conference following its monetary policy meeting, markets will then have to digest May retail sales data. This report will provide a glimpse as to how healthy the U.S. consumer is.

The week ends with the release of regional manufacturing data.

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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