Gold Investors, This Is How To Play Next Week's Fed Meeting - Analysts

(Kitco News) - After weeks of back-and-forth speculation, leading to increased volatility, the Federal Reserve will release its much-anticipated monetary policy decision, which could end up being positive for gold prices.

After two positive weekly closes, the gold market ended the week in negative territory as traders continue to square their books ahead next week’s Federal Open Market Committee meeting, which will include updated economic forecasts and a press conference with Fed Chair Janet Yellen.

December Comex gold futures settled Friday at $1,310.20 an ounce, down 1.6% on the week. For the second consecutive week December Comex silver futures settled the week in negative territory at $18.862 an ounce, down 1.8%.

The selling pressure could continue early into next week but could see a bounce as the U.S. central bank is not expected to raise interest rates next week.

“I think we could see prices dip below $1,300 ahead of the meeting as some investors are pricing in a long-shot rate hike,” said KC Chang, commodity analyst at IHS Global Insights. “But I think we could see a push higher after the meeting. There is not enough data on inflation or the labor market to justify a rate hike next week.”

Not only does the Fed not have enough data to support a move in September, but Nick Exarhos, senior economist at CIBC World Markets, said that it will be difficult for the central bank to strike a hawkish tone in its statement because of recent weak data.

“The Fed is going to have to address the recent spate of weak economic data,” he said.

Looking at gold prices, Darin Newsom, senior technical analyst with DTN, said that if gold prices can’t hold support at $1,305.50 an ounce then first major resistance point comes in at $1,241.50 an ounce, which represents the 50% retracement level from July’s multi-year high to August’s lows.

“Right now, the technicals are kind of neutral and both bulls and bears can make an argument. The key will be whether or not $1,305.50 can hold. If we make a new four-week low then prices are headed lower in the near-term.”

Mike Dragosits, senior commodity strategist at TD Securities, said that he is expecting to see a bounce later in the week after the Fed’s monetary policy announcement. He added that the Fed won’t add anything new, except maybe confirm a move in December.

What Do Markets Say

Market expectations ahead of next week’s announcement has been extremely volatile. Markets at one point, since the July meeting, priced in a more than 30% chance of a rate hike.

However, expectations have recently fallen with the CME Group’s FedWatch Tool showing that markets are pricing in only a 15% probability of a rate hike next week.

Looking further down the calendar, markets are pricing in only a 23.8% chance of a move in November. By December, markets see a 52.8% chance that interest rates will be at least 25 basis point higher.

How To Play This Fed Meeting

Newsom, who has been short the gold market since early August, said that he recommends buying short-term calls. He warned that investors will be paying a premium on the time limit but it is a good hedge for short-term traders.

“If the Fed does hike then you can drop the calls and ride the short trade as gold will go lower,” he said. “If the Fed doesn’t raise rates then you can ride the calls.”

Many analysts continue to remain bullish on gold and recommend investors look for strategic opportunities to buy on dips.

Although it’s unlikely, commodity analysts at Capital Economic said that even if the Fed does raise rates on Wednesday, they remain bullish on gold.

They said in a note Friday, “[W]e expect any subsequent weakness in the gold price to be short-lived. Indeed, lingering global risks should ensure that demand for gold as a safe haven remains strong.”

Another Central Bank Gold Needs To Pay Attention To

Although the U.S. central bank has garnered major market attention, some analysts noted that there is another central bank that investors should keep an eye on.

Ahead of the Fed’s monetary policy decision, the Bank of Japan will also release its monetary policy outlook. Economists at Nomura said that they do not expect the BOJ to announce any new stimulus measures, which could rise global bond yields – a negative factor for gold prices as it increases the metal’s opportunity costs.

However, Dragosits said that it appears that bond yields have bottomed but he doesn’t see it as a major hurdle for the gold market.

“I think bond yields can move higher but I don’t think we are seeing a fundamental shift in the market. Global yields are still extremely low, which is still positive for gold.”

 Level To Watch

According to technical analysts, the key support point to watch will be August lows at $1,305.50 an ounce.
Chris Beauchamp, market analyst at IG, said that a break below this level could lead to an ultimate test of support at the 200-day moving average at $1,273.

Below $1,300 an ounce, analysts at iiTrader said that they are watching support at $1,295.70 and they see strong four-star support above $1,253 an ounce.

Although most of the market’s attention will be on the Federal Reserve meeting next week, markets will also get some housing data, including existing home sales for August and building permit data. At the end of the week, markets will receive preliminary manufacturing data.

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow @Neils_C