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Fed Could Drop Its 'Hawkish Instincts' And Help Gold Break Out

Kitco News

Fed Could Drop Its ‘Hawkish Instincts’ And Help Gold Breakout

(Kitco News) - There is a chance that the Federal Reserve might keep its “hawkish instincts” at bay on Wednesday, allowing gold to break out from its narrow trading range, TD Securities said in a report.

“The probability of another rate hike is being priced at nearly 100%,” head of commodity strategy at TD Securities Bart Melek said in a report published on Monday. “Given the current equity market weakness, recent lackluster economic data and trade war rhetoric getting louder, we judge that a hawkish tone is not … warranted at this time.”

Gold might see an optimistic outcome this week, the report stated. “Given recent positioning, if Fed officials do not adjust the dot plots higher, the yellow metal could find a bid and move considerably higher later this week,” Melek said.

The previous five rate hikes all triggered the same response in gold after being interpreted as “dovish,” according to TD Securities.

“Gold [sold] off ahead of the move, only to rally strongly once the rate increase was announced,” Melek pointed out.

Gold has been stuck in a tight range since the beginning of March, trading between $1,302-$1,340.

The reason behind this narrow range is an on-going battle between a possible hawkish Fed versus heightened geopolitical tensions.

“Traders are conflicted: on the one hand, they are focusing on the pending rate hikes, … while on the other, they are also responding to increased geopolitical uncertainty and the loss of risk appetite,” Melek explained.

One of the biggest geopolitical uncertainties at the moment is Washington embracing a “full blown” protectionism.

“Protectionism … would no doubt be perceived to hurt global growth as the international flow of goods shrinks, could be very helpful to gold. Weaker-than-expected global growth would lower real interest rates and be a negative for equities, which should get the yellow metal to move above the current trading range to test recent highs of above $1,366/oz,” Melek wrote.

Early on Tuesday, gold prices were flat, with spot gold on Kitco.com trading at $1,316.50, down 0.01% on the day and April Comex gold futures last seen at $1,316.10, down 0.13% on the day.

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