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Gold Prices To End The Year Below $1,200 As Fed Takes Priority - Westpac

Kitco News

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(Kitco News) - The Federal Reserve’s hawkish tightening cycle, a strong economy, and a higher U.S. dollar will steal all of the market’s attention this year as the trade war tensions pause, pressuring gold prices even further, according to Sydney-based Westpac.

The Australian bank projects for the yellow metal to end the year at $1,190 an ounce, which is quite a drop from the current $1,240s level. August Comex gold futures were last seen trading at $1,246.80, up 0.02% on the day, following another major sell-off earlier this week.

“Notwithstanding the current trade war, we do expect to see significant strength in the U.S. economy in Q3 and Q4. We expect the Fed to continue its rate hike process,” Westpac global head of market strategy Robert Rennie told Kitco News on Friday. “We’ve been forecasting one further rate hike this year and two next year. But, depending on the evolution of the economic data, we could see that switched around to the Fed executing a total of four rate hikes this year.”

When you put all of that together, you get a structurally negative environment for gold — a stronger U.S. dollar — which has already been heavily suppressing the precious metal’s prices this year.

“We expect to see further strength in U.S. dollar for the remainder of this year. For instance, we project the DXY index to be up at 97 by the end of this year. To put that into context, that would have the U.S. dollar at the highest level since mid-2017,” Rennie said. “This is a fairly compelling argument for further weakness in gold, at least through the end of this year.”

The current level of around $1,240s is a very important trend line for gold, according to Westpac, as it brings up the lows from the end of 2015 and the end of 2016.

“In the short-term, the market will use it as an important measure of sentiment. If we were to break below $1,240 that would be seen as important short-term failure for gold,” noted Rennie.

At the end of the day, the Australian bank believes that the $1,240 level will be breached on the downside.

“We’ve got gold continuing to sit at current levels and then going lower through end of this year, down to $1,190 by the end of this year. In other words, gold breaks this trend line that we are currently sitting on,” Rennie described.

Trade War On Pause Till End Of Summer

The trade war played an important role guiding gold prices this spring and summer, catching many investors off guard by first stalling the precious metal’s rally and then forcing gold to behave counterintuitively by losing its safe-haven allure.

“Neither gold nor the yen are acting as traditional safe heavens. Markets are in the process of trying to adjust to that at the moment,” Rennie pointed out.

Important element to keep in mind when analyzing the current trade war rhetoric is that everything the U.S. President Donald Trump does is part of a “systematic” and “prescribed” process, said Rennie.

“Trump is on a prescribed and lengthy process that will ultimately see tariffs on a very wide range of U.S. imports and exports. He has told his electorate that he wants to bring those tariffs in and he is executing that policy,” he explained. “Whereas markets tend to see it as a negotiation, but I think this is a fairly premeditative path.”

In the short-term, the trade war tensions will take a pause until September, added Rennie, noting that we are entering “a lull period” in the coming weeks after some “very dramatic reactions.”

Some things to keep an eye on in the meantime include, “the public hearings on the auto investigations next week and the public hearings on the additional $16 billion of Section 301 tariffs the week after.”

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