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Gold Is Watching Fed’s Language, Not Hike Decision - Analysts

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(Kitco News) - With gold trading near $1,300 an ounce, the precious metals market is focusing on the Federal Reserve’s language during the press conference, which is scheduled for immediately after the central bank’s rate decision on Wednesday.

“On the precious metals side, the market will surely be watching the FOMC decision, where it is widely expected that Chair Powell will increase rates for the second time this year, but the press conference that follows will likely be the main event,” TD Securities commodity strategist Ryan McKay said in a note published on Monday.

The main things to monitor are the Fed’s tone and its outlook on inflation, according to McKay.

“A dovish tone or any more hints at an inflation overshoot could jolt the precious metals specs back into action,” he said.

Since Wednesday’s very likely rate hike has already been priced in by the markets, the language of the Fed Chair Jerome Powell’s press conference is taking center stage, according to Kitco’s global trading director Peter Hug.

“It will be the language on the glide path that will be analyzed. With the recent turbulence in the Italian bond market and other issues within the EU, it is likely the Fed may signal a pause through the summer and it becomes likely that the mid-terms may hold them off until December,” Hug wrote in his post on Kitco.com on Tuesday. 

“We would expect some weakness into the announcement, a possible knee-jerk reaction lower and a modest rally, if the Fed does not surprise with a more hawkish stance. Gold continues to be bound by the $1,287 - $1,307 levels, but we suspect this range will be taken out this week,” Hug added.

Economists at ABN Amro added that investors need to pay close attention to the Fed’s Summary of Economic Projections, noting that a change to the dot plot is coming.

“The FOMC will almost certainly raise its target range for the fed funds rate by 25bp this Wednesday, taking the upper bound to 2.00%. The focus for markets will be on: 1) the quarterly Summary of Economic Projections (SEP), and 2) Fed Chair Powell’s press conference,” economists said in a note published on Tuesday.

“For the SEP, unlike last time, we do not expect significant changes to the ‘dots’ projections for further rate hikes this year and next,” economists pointed out. “[But], given that it was on the borderline in March between a 3- and 4-hike projection for 2018, we think it is a matter of time – or more specifically, Senate approvals – before the dots shift to expecting four rate hikes this year."

Gold is waiting for a catalyst to move prices higher or lower, said Todd ‘Bubba’ Horwitz, chief market strategist of BubbaTrading.com, highlighting that the Fed’s announcement could potentially trigger a rally.

“There are no guarantees when making a trade, but all signs lead to a rally in gold,” Horwitz said in his post on Kitco.com. “We believe the move will be up and that the bottoms are in. The lows made in gold at $1,281 appear to be the support level and our first target is $1,330.” 

TD Securities added that it sees gold rising towards $1,400 an ounce in 2019 due to weaker a U.S. dollar next year.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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