Dovish Fed Rate Hike Could Save Gold From Latest Yawn Fest - TD Securities
(Kitco News) - Gold’s reaction to geopolitical risks and heightened trade tensions has been a very timid one, but next week’s expected “dovish” rate hike by the Federal Reserve could finally help the yellow metal climb above $1,300, said TD Securities.
“Should the Fed signal that it intends to stick to its game-plan, allowing inflation to somewhat overshoot its target, we suspect that next week's FOMC meeting could be viewed as a dovish hike, which would prompt gold to trade above $1,300/oz as real rates remain low,” TD Securities commodity strategists Ryan McKay and Daniel Ghali said in a note.
During the last few weeks, gold has been losing the race against cash-flow yielding assets, despite having safe-haven appeal amid trade war rhetoric and increased geopolitical tensions.
“The imposition of tariffs on U.S. strategic allies, renewed trade tensions with the Middle Kingdom along with a European crisis that sent Italian sovereign yields surging were all unsuccessful in seeing the yellow metal trade higher,” McKay and Ghali wrote on Monday.
Keeping gold prices at bay is the rallying U.S. dollar, which received additional support from strong economic data released in the U.S. last week, strategists said.
“Positive macroeconomic data in the U.S. have bolstered convictions in the strength of the economy, and with all eyes on next week's widely anticipated Fed hike,” McKay and Ghali stated.
But, geopolitical tensions cannot be discounted in the long-term, according to TD Securities, especially with the China trade situation as well as possible tit-for-tat retaliation from U.S. allies following introduction of American tariffs against Mexico, EU and Canada.
“Renewed concerns surrounding global trade activity argues for higher gold prices as tariffs are inflationary in nature,” McKay and Ghali pointed out. “[Yet] given the tight trading range, positive macroeconomic data in the US, along with higher oil prices which some see as a risk to higher rates, we expect gold to underwhelm into next week before it ultimately recovers.”
Gold has been stuck below the key psychological level of $1,300 an ounce since May. The yellow metal began the first week of June with a rather uneventful session, as prices traded modestly lower on Monday afternoon following a recovery in the U.S. dollar index from some overnight losses. August Comex gold futures were last at $1,297.30, down 0.15% on the day.