Fed Unlikely To Provide Support For Gold Next Week - Analysts

(Kitco News) - After disappointing economic growth at the end of the fourth quarter, all eyes will be on the Federal Reserve next week as they hold their first monetary policy meeting of the year. Ahead of the meeting, analysts are cautious as to what impact it could have on gold.

Most analysts said that gold could test the lower bounds of its current range even if the Fed is expected to stick to a fairly tight script ahead of January’s nonfarm payrolls report due for release Friday.

Gold could see continued pressure as it prepares to close the week in negative territory, ending its four-week winning streak. February gold futures settled at $1,188.40 an ounce, down more than 1% since last week.

Silver has managed to defy the odds as it holds onto slim gains for the fifth consecutive week; silver March futures settled at $17.132 an ounce, up 0.6% on the week.

Bill Baruch, senior market strategist at iiTrader, said that he could see gold continue to struggle next week as traders reach to over-stretched market conditions. He added that he expects the U.S. dollar to strengthen heading into the Fed meeting.

“The U.S. dollar is at its lows and gold prices are at their highs. I think you will see these markets return to their medians ahead of the Fed next week,” he said.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he sees gold fighting to find support next week as the market is pressured by rising bond yields. He added that he sees the Fed taking a cautious tone next week but expectations of eventual rate hikes will overshadow the gold market.

“The jury is still out on whether President Donald Trump’s policies are dollar positive or dollar negative. Because of this I don’t think the Fed will want to take a strong stand either way. Even after this meeting, they still have plenty of time to achieve their target of three interest rate hikes,” he said.

What Do the Markets Say?

Markets are not expecting to see any surprises at Wednesday’s policy meeting conclusion; CME 30-Day Fed Fund futures are pricing in only a 4% chance of a rate hike.

Expectations pick up in March as markets price in a 25% chance of a rate hike. June is seen as the most likely month for the first rate hike of the year with markets pricing in an almost 70% chance of a 25 basis-point move.

Historic Equity Rally vs. Bond Yields

Last week was a historic moment for equity markets as the Dow Jones Industrial Average and the S&P 500 rose to record levels. This shift in risk sentiment has taken some momentum away from the precious metals, but some analysts said that this is just a minor factor compared with the bond market and yield levels.

In a report Thursday, Jonathan Butler, precious metals strategist at Mitsubishi, said that the equity rally is a resumption of the Trump reflation trade as the newly-minted President moves forward with some of his economic policies.
However, he also warned that “We should be cautious of reading too much into this as the Dow tracks just 30 equities and is skewed towards those with the highest share prices such as Goldman Sachs. More significantly for gold, the 10 year US Treasury yield continues to show every sign of breaking out of its 30-year downtrend.”

Simona Gambarini, commodities economist for Capital Economics, said that she is more focused on bond yields and with her firm expecting four rate hikes this year, yields have room to move considerably higher, weighing on gold.

“Gold could remain range bound in the near term but we just don’t see much of a catalyst for prices to rally in the long term,” she said.

Levels to Watch

While gold ended the week near a two-week low, the market has managed to hold key support above $1,182 an ounce. Analysts said this is the first level to watch as prices try to find some support.

Hansen said that if gold falls below $1,182 an ounce, there will be an important battle for support between $1,172 and $1,160. A break of these channels could lead to a test of the 2016 lows.

Baruch added that he is also watching the $1,160 level and agreed that if that support area breaks, the next level to watch will be $1,150 an ounce.

However, he added that this would represent long-term value for investors.

Chris Beauchamp, market analyst at IG, warned that with little buying pressure, it could only be a matter of time before prices test support at $1,173 an ounce. “Below this, $1160 and $1140 come into view. Any buying will need to recover $1190 to suggest the pullback has run its course,” he said.

The Final Say

While the U.S. central bank will be in the spotlight next week, Baruch is warning that investors cannot ignore U.S. economic data.

In particular, the Institute of Supply Management’s manufacturing and nonmanufacturing reports for January as well as the latest employment report.

“This data will show just how strong the U.S. economy was at the start of the year and could set the tone for future Fed rate hikes,” said Baruch.

The Fed is not the only central bank to meet next week. The Bank of Japan meets at the start of the week.

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