Gold Outlook
High Expectations For Gold To Rally After Fed Next Week
(Kitco News) - The saying ‘three times a charm’ may apply to the gold market next week as some analysts say the metal may be setting itself up for a decent rally following a Fed rate hike.
The trend started in 2015; after hitting a low following the first Federal Reserve rate hike in nearly a decade, gold saw one of its best rallies in recent history. Gold also bottomed out last December before rallying 9%.
“My bias is that after a rate hike we build a base and move up from there,” said Ryan Latinovich, global head of mining and metals at RBC, in a panel discussion on the future of mining finance during the Prospectors & Developers Association of Canada’s (PDAC) 2017 convention in Toronto.
That sentiment was also reflected in gold’s reaction following February’s nonfarm payrolls report, which showed that 235,000 new jobs were created last month in the U.S. Despite the strong employment data, gold was able to hold a key support level.
Analysts noted that gold has been selling off ahead of the data in anticipation of the Fed’s monetary policy decision Wednesday. The yellow metal is preparing for its second week of losses, falling 2% from the previous week, last trading at $1,201.70
“Gold has certainly struggled because of the near certainty that the Fed will raise rates but there was no new information provided in the employment data. I think we are seeing a bit of short-covering supporting the gold market into the weekend,” said Jasper Lawler, senior market analyst at the London Capital Group.
Silver, the early shining star in the precious metals markets, has also struggled this past week, with March silver futures falling 4.5% from last week with prices dropping below $17 an ounce, last trading at $16.895.
What Do The Markets Say
Analyst said that gold’s two week drop to $1,200 an ounce means the market has now all but priced in next week’s move and it will be difficult for prices to move lower as there is really nowhere for expectations to go.
CME 30-day Fed Fund futures are pricing in a 93% chance of a rate hike, up from around an 80% chance seen at the start of the week. At the same time, 100 economists polled by Reuters expect the Fed to raise interest rates next week.
While the rate hike is coming earlier than many were forecasting at the start of the year, the expected trajectory of interest rates this year has remained unchanged at three rate hikes in 2017, which analysts say could be good for gold.
“I’m bullish on gold based on the fact that everything is priced into markets,” said Ole Hansen, head of commodity strategy at Saxo Bank. “After this rate hike we will have lots of geopolitical uncertainty and equities are still highly overvalued that those are two factor that are positive for gold.”
However, Hansen warned that investors should not expect the market to take off right after the Fed. He sees a more gradual rise in the price of gold.
“I don’t think investors are looking for absolute returns in gold but looking for diversification. There is definitely some support for the market but there is no aggressive buying.”
The U.S. Dollar Has Topped Out
Once the U.S. central bank monetary policy is in the market’s rearview mirror, Adam Button, currency strategist at Forexlive.com, said that focus will turn back on America’s trade and currency policies.
“The uncertainty surrounding [President Donald] Trump’s policies is going to be a tailwind for gold but the timing will be difficult to predict he said. “I struggle to see continued U.S. dollar strength after the Fed meeting.”
Button said that until there is “crystal-clear clarity” on the U.S. dollar and trade policies, gold is a buy on the dips.
“Demand for safety is under-rated at this point,” he said.
Levels To Watch…
Both Lawler and Hanson noted that gold has managed to hold key support above $1,190, which represents the 50% retracement of the rally from the December lows to the February highs.
However, even if prices break below that, as long as the market can find some support around $1,180, gold is still in a bullish uptrend, they said.
“If we drop below $1,180 it will be difficult to make a bullish case for gold,” said Button.
On the upside, Hansen said that gold should be able to test resistance at $1,220 in the near-term.
Lawler said that he sees gold’s potential momentum capping out at $1,225 in the near-term but first prices need to break initial resistance at $1,208.
“I don’t see a big rally next week but I don’t see prices falling lower either,” he said.
The Final Say…
Although all the attention will be on Wednesday’s Federal Reserve monetary policy decision, there is some U.S. economic data next week that could provide some short-term volatility.
Most importantly for the gold market will be U.S. inflation data with both the Producer Price Index and Consumer Price Index numbers to be released next week. Analysts noted that it is still too early to determine if the Fed will be behind the inflation curve this year so any rise in inflation could be positive for gold.
Markets will also receive some regional manufacturing data for March.
Finally, the day after the Fed meets, the Bank of England will announce its monetary policy decision. Gold analysts have noted that gold demand in Europe and U.K. have helped to support gold prices this year, as the U.S. dollar has held on to near-term strength.
Any weakness in the British pound could boost the nation’s domestic gold demand, supporting the global market, according to some analysts.
