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What Does Gold Do When 'Nothing Is Trading Normally'?

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What Does Gold Do When ‘Nothing Is Trading Normally’?

(Kitco News) - Gold is in “its own little world” and determining what will make or break the next rally just got harder, according to one gold analyst.

“I think gold is its own little world,” a gold analyst and broker with Chicago-based Ambrosino Brothers Todd Colvin told The Globe And Mail.

The usual role gold plays in a portfolio is as a hedge against inflation.

“When I look at gold, I look at it as a barometer for two things: the U.S. dollar/Fed [Federal Reserve] and that global-macro [inflation] hedge, and nothing is trading normally,” Colvin said.

But, this year, gold’s usual trading patterns have been broken. This was particularly visible when the equity market tumbled at the end of January and beginning of February.

In response to a major drop in equities, gold didn’t rally as much as analysts expected. The yellow metal also didn’t react to renewed weakness in the U.S. dollar.

Colvin pointed out that the next Federal Reserve rate announcement would provide some clarity for the precious metal.

“It's one of those trades where we're waiting to see what happens when [Jerome] Powell steps in, we're waiting to see what happens when the Fed tightens, how much are they going to tighten this year,” Colvin said.

Gold prices were trading weaker this week as traders focused on the Fed rate decision scheduled for Wednesday. April Comex gold futures dropped from $1,319 to $1,310 this week and were last seen at $1,312.10, up 0.02% on the day.

What is widely expected from the Fed is another raise by 25 basis points to 1.50-1.75%.

What is unclear though and could give markets pause are any economic updates, Powell’s tone, and any new outside risks, said Bill Diviney, senior economist at ABN Amro.

“In terms of Chair Powell, while his prepared statement is likely to be balanced, we expect he will continue to sound moderately hawkish in the Q&A in emphasizing the upside risks to growth, consistent with his congressional testimony performance a few weeks ago,” Diviney said in a note published on Monday.

“A shift up in the median FOMC projection to four hikes in 2018 would certainly have an impact on markets, but given the degree of expectation now for this to happen, we suspect the market reaction would be just as big if the median stayed at three hikes for this year,” he added.

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