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If Fed Signals Weak Inflation, Gold Could Move Back Up To $1,300 — TD Securities

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If Fed Signals Weak Inflation, Gold Could Move Back Up To $1,300 — TD Securities

(Kitco News) - After another disappointing trading session, one bank sees gold ending the week on a positive note, with prices possibly moving up to $1,300 an ounce if the Federal Reserve hints at weak inflation on Wednesday.

“Should inflation disappoint or the Fed communicate some caution with regards to the persistence in weak inflation, the yield curve's flattening could play a big role in sending gold prices back to the $1,260-$1,300/oz range,” said head of commodity strategy at TD Securities Bart Melek in a report published on Monday.

Gold prices declined below the 200-day moving average, touching a low of $1,241.74 an ounce on Monday, as risk-on sentiment continued to dominate the markets. Spot gold on was last at $1243.60, up 0.17% on the day, while February Comex gold was last at $1,245.90, down 0.08% on the day.

But, the weakness in gold is unlikely to continue, Melek said.

The Fed statement coming this Wednesday might not be as positive as the markets expect, even despite a rate hike announcement.

“While Fed funds hike expectations for Wednesday are almost fully priced in and there is little doubt the US central bank will pull the trigger on higher rates in December, it's too early to get overly negative on the precious metals,” said Melek. “With inflation nowhere near target, low US labor participation and weak wage growth, the message from the FOMC may very well be quite ambiguous.”

Inflation is likely to take center stage during the meeting and the Fed could signal that it is being very careful around its projections as well as future rate hikes.

“If Janet Yellen, in her last meeting as Chair, raises concerns that the central bank's models may be misspecifying inflation, the market will likely perceive this to mean that there will be fewer hikes than the dot plots suggest,” Melek said. “With the inflation path still in doubt, there may be little reason for the FOMC to get more hawkish.”

If the Fed is indeed less aggressive than currently estimated, the U.S. dollar might see some weakness and the yield curve could remain on a flat trajectory, which could mean that carry and opportunity costs of holding gold would be low, he added.

“The newly nominated Fed Chair, Powell, seems to be supportive of only a gradual approach to tightening and he stated that there is still slack in the labor market,” Melek said. “This is good news for gold and silver, if these views are expressed by the FOMC. As such, a return of gold back to the 200dma ($1,267/oz) is still very much in the cards following the rate decision day.”

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