Gold To Remain Under Pressure As Metal ‘Gives Way’ To Hawkish Fed
(Kitco News) - After taking a hit and plunging below $1,300 an ounce this week, gold is looking to remain under pressure, as the more aggressive U.S. Federal Reserve holds the yellow metal back, according to analysts.
Prices are likely to “gravitate lower,” Bart Melek, head of global strategy at TD Securities told Kitco News. “Looking at mid-$1,280 on the downside and strong resistance right around $1,315.”
The precious metal gave way to a more hawkish Fed this week, said Christopher Louney, commodity strategist at RBC Capital Markets, who was expecting to see a downturn in gold ever since it rallied up to $1,350.
“The Fed said it remains on track for another rate hike before year-end. What we are looking for is some stability in gold now,” Louney said.
On Wednesday, the Federal Open Market Committee kept its key interest rate unchanged, while announcing that it still plans to raise rates at least one more time this year. The central bank also said it will begin shrinking its $4.5-trillion balance sheet in October.
On Friday, gold managed to recover somewhat from its post-FOMC drop, rising on additional safe-haven demand triggered by new North Korea threats of testing a hydrogen bomb over the Pacific Ocean. The country’s leader Kim Jong-Un also referred to President Donald Trump as a “mentally deranged U.S. dotard.” December Comex gold was last seen trading at $1,299.60, up 0.37% on the day.
North Korea merits attention next week, said Louney. “Increases in geopolitical risks could lead to spikes in gold prices. But, macro forecast points to gold being below $1,300.”
Louney pointed out that gold has been “shrugging off a lot of geopolitical worries” lately, as increased risks are now the “new normal.”
“The bar that you have to clear to get large spikes is pretty heavy. In the context of geopolitical uncertainty, you need a pretty significant event to get a sustained tick higher in gold prices,” he said.
However, some analysts see North Korea playing a bigger role next week, which could push prices higher.
“Looking for a break above $1,300, as North Korea is driving the safe-haven trade. The issue did go away for a bit, but now it came back. Support is at $1,276 and resistance is at $1,326-$1,330,” said Jonathan Butler, an analyst at Mitsubishi.
Others project that the U.S. dollar index will decline next week and boost gold. “The dollar index started a new downtrend and this will help buoy the metal in the long run. Not to mention ongoing geopolitical fears,” said Bill Baruch, principal at Blue Line Futures.
The dollar rally following the Fed announcement appears to be over, added Colin Cieszynski, chief market strategist at CMC Markets. “Technically, gold has bounced up off of its 50-day average and overbought conditions have eased. So things could be looking up for gold.”
But, a lot of technical damage has already been done this week, Cieszynski pointed out. “Gold needs to retake $1,300 to signal the end of the current selloff which it has not been able to do yet. Gold could consolidate in the $1,280-$1,300 range in the coming week, so I am neutral.”
What To Watch
It will be wise to pay close attention to any North Korea developments next week, said Melek. “Any escalation in rhetoric or missile tests are potential for the upside.”
From a macro data perspective, economists pointed to the final U.S. Q2 GDP release and Personal Consumption Expenditures (PCE) index, scheduled for publication on Thursday and Friday, respectively.
“Significant upgrade to the final GDP could drive gold lower. There is also the Fed’s favorite inflation measure. If we see a pickup in inflation, a December rate hike becomes more certain and that would be a downside for gold,” Melek explained.
Sunday’s election in Germany is also an important event to keep an eye on, even though no surprises are expected. German Chancellor Angela Merkel is the favorite to win against Social Democratic chancellor candidate Martin Schulz. If Merkel wins, it will be her fourth term in power.
“From all accounts, it looks like Merkel will win again. The big surprise would be if the AfD, the far-right Alternative for Germany party, got a strong showing. The focus is not on what happens between Merkel and Schulz, but on the AfD. Also, if they do worse than 8%, that could have an impact as well,” Cieszynski said.
On top of that, there are a number of key Fed speakers lined up for next week, including Fed Chair Janet Yellen’s address on Tuesday.
“Yellen’s comments and the U.S. dollar are likely to have the most influence on gold next week,” said Cieszynski.