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Gold Investors Need To Watch Fed's Long-Term Rate Projections

Kitco News

(Kitco News) - Gold has been stuck around $1,200 an ounce for the last six weeks, but there are rising expectations of an imminent break following Wednesday's Federal Reserve monetary policy decision.

Markets have already priced in a 25-basis point hike following the meeting; however, the key for the gold market will be the future trajectory of interest rate hikes, known as the dot plots and where the Federal Reserve sees long-term interest rates.

Investors will also need to pay close attention to what Federal Reserve Chairman Jerome Powell has to say at his press conference following the monetary policy announcement.

In its previous economic projections, the central bank forecasted a total of four rate hikes this year and three rate hikes in 2019. The dot plots also showed that the committee saw long-term interest rates, or the neutral rate at 2.9%.

According to commodity analysts, markets are anxious to see if the central bank will update its trajectory of future interest rates, raising their long-term forecast. Since the release of the last economic projections, data has pointed to strong economic growth. In August, second-quarter gross domestic product increased to 4.2%. It is one of the fastest growing economies among developed nations.

However, many economists are not expecting to see material changes in long-term projections because of growing risks in the global marketplace.

"Growth and inflation forecasts could be tweaked higher, but we also suspect the Fed will follow other central banks in warning of the downside risks coming from global trade tensions," said currency strategists from Brown Brothers Harriman. "The dot plots currently show two more hikes in 2018, three in 2019, and one in 2020. The Fed's perceived rate path seems unlikely to change this time around, especially given Chairman Powell's more cautious tone at Jackson Hole last month."

Economists at Nomura said that while there will be some movement in the dot plots, they don't expect to see a material change to long-term interest rate expectations.

Royce Mendes, senior economist at CIBC World Markets, said that market risks are skewed modestly to the dovish side.

"Indeed, it would take fewer changes to see some of the median interest rate forecasts moving slightly lower than what would be needed to see an upside move. Nevertheless, the most likely outcome is that investors get what they were expecting, leaving the immediate impact on rates and the dollar relatively neutral," he said in a report Tuesday.

Economists at Capital Economics expect the Federal Reserve to continue to raise interest rates through to mid-2019, but they don't expect to see any dramatic shift in long-term rates.

"By mid-2019, however, we expect the boost from fiscal stimulus to be fading, and the sharp rise in market interest rates will begin to weigh on consumption and investment more heavily. We also expect the yield curve to have inverted by the middle of next year," the analysts said in a report published last week. "Under those circumstances, we'd expect the Fed to first move to the sidelines, and then to begin cutting rates in 2020."

With this outlook, the firm's commodity economists don't expect to see a marginal move in gold until the end of 2019.

Economists at TD Securities see a growing risk that the Federal Reserve lowers its long-term interest rate as a new voter is added to the committee.

"Our macro team cites a drift lower in the longer term dot as their base case. This, and a potential to shift to two hikes rather than three in 2019 would suggest the Fed hiking cycle is nearing an end, which would ultimately provide a boost to precious metals," the bank's commodity analysts said.

Bill Baruch, president of Blue Line Futures, also expects to see gold prices push higher following the conclusion of the central bank's monetary policy meeting. He said in a recent interview with Kitco News that the Fed can't get any more hawkish than it already is.

However, he also said that technically, the gold market has to do some heavy lifting to squeeze bearish investors.

"Price action continues to struggle to trade out above first key resistance at $1,210.9-$1,214.9 but on a positive note is remaining constructive above $1,204," he said in a note Tuesday. "Gold must trade out above $1,220.7 in order to truly begin to squeeze the near-record short position."

December gold futures last traded at $1.205.90 an ounce, up 0.12% on the day.

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.