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Mitsubishi: Gold Price May Get 'Buy-The-Fact' Bounce After Fed

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(Kitco News) - Gold may well get a “buy-the-fact” bounce after this week’s meeting of the U.S. Federal Open Market Committee, although traders will be closely scrutinizing communications from policymakers for clues on what to expect next for monetary policy, says Mitsubishi.

The FOMC meets Tuesday and Wednesday, with another 25-basis-point rate hike widely expected.

“Gold and precious metals tend to be bought on the fact of a rate hike, having been sold off previously on the rumor (the opposite is usually the case for the dollar), and this is likely to be the case this time with gold having lost ~$70 (5%) since the Fed’s 20th September meeting, when the summary of forecasts was last updated,” said a research note from Jonathan Butler, precious-metals strategist with Mitsubishi.

Comex February gold traded to a nearly five-month low of $1,244.40 an ounce Friday, although the metal has bounced modestly so far Monday and was up $2.60 to $1,251 as of 8:20 a.m. EST.

“Though gold could bounce higher in the near term as investors ‘buy the fact’ of a hike, the outlook for rate rises going into next year will be of arguably greater interest for precious metals,” Butler said.

The FOMC’s policy statement, Janet Yellen’s final press conference as Fed chair and an updated summary of economic projections (the so-called “dot plot”) are all due out on Wednesday and will be closely parsed for signs of the Fed’s longer-term intentions, Butler said.

Still, he added, strong signals from policymakers “may be thin on the ground,” as there could be few major changes before Jerome Powell becomes the next chief of the Federal Reserve. Further, there are several vacancies at the Fed still to be filled, creating uncertainty over the future direction of rates, Butler said.

“Dovish language or any caution on the future pace of interest-rate hikes from the currently projected three or four forecast next year would give some support to gold and precious by weakening the dollar and lowering Treasury yields,” he said. “Projections of robust economic growth, coupled with a pickup in inflation next year, may indicate conditions will be favorable towards an acceleration [of] rate rises. This will weigh on gold in the longer term, but it remains to be seen if the Fed considers markets ready for a more hawkish rate outlook yet.”

Butler did outline one other factor that could lead to some gold buying – “risk hedging in gold” on ideas that so-called risk markets, like soaring equities, could be due to a correction.

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