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Analysts Worried That Gold Market Too Aggressive On Dovish Fed – Analysts

Kitco News

(Kitco News) - Sentiment is clearly turning bullish for gold as prices broke through critical resistance, pushing to their highest level since early-April 2018; however, some analysts are warning that gold could face a short-term setback next week following the Federal Reserve's monetary policy meeting.

Gold's solid run, four-week rally was partly the result of aggressive market calls for the Federal Reserve to loosen monetary policy with the growing expectation that the first cut would come in July. However, the market's fortunes could shift if the Fed doesn't meet the market's dovish expectations.

Gold prices were unable to hold Friday's rally that saw prices hit a one-year high. August gold futures last traded at $1,343.40 an ounce, relatively unchanged from the previous week.

"Friday's close is going to be key to the market's momentum going forward," said Darin Newsom, president of Darin Newsom Analysis. "If we get a bearish close below $1,350, I think you will see the start of a short-term downtrend."

On the upside, Newsom said that gold prices need to push above $1,365.40 an ounce to generate new upside momentum.

Heading into next week, the June monetary policy meeting, with its latest monetary policy statement and updated economic projections, represent the most significant economic risk for markets next week, according to some economists.

"Since the FOMC meeting in May, economic momentum has slowed, as the impact of fiscal stimulus continues to fade and financial conditions remain relatively tight," said economists from Nomura, in a report Friday. "In addition, downside risks to the economic outlook have increased with heightened uncertainty from protectionist trade policy and slowing external growth."

However, some analysts have said they are a little worried that markets have gotten ahead of themselves as the U.S. central bank is unlikely to signal a rate cut next month.

"Undoubtedly, the statement needs to read more dovish than the May 1st version," said economists at CIBC Capital Markets. "However, for those looking for signs that policymakers will be cutting at the very next meeting, what the statement giveth in terms of dovish language, the dot plots and summary of economic projections could taketh away."

The CME FedWatch Tool shows that markets are pricing in a more than 80% chance of looser U.S. monetary policy in July. Markets are pricing in nearly four rate cuts by the end of the year.

"If the Fed doesn't tee-up a rate cut for July then sentiment could shift again and that will be negative for gold," said David Madden, market analyst at CMC Markets.

With unemployment sitting at near a 50-year low, economic data holding relatively steady and inflation pressures non-existent, Madden added that it's difficult to see the U.S. central bank cutting interest rates so soon.

In a recent interview with Kitco News, Chantelle Schieven, head of research at Murenbeeld & Co., also said that she thinks the state of the U.S. economy justifies a rate cut so soon.

"The economy is not tremendously strong, but it's also not that bad," she said. "I just feel that a rate cut in July would send the wrong message."

Will The Market Believe The Fed's Outlook

Although the gold market is nearing overbought territory after hitting a new one-year high, some analysts also said that investors might not have to worry about the Fed just yet.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he is short-term bearish. However, he added that he would look to buy dips as weak economic data point to a slower U.S. economy and will prompt the Fed to cut rates eventually.

"You can't ignore weak Chinese number and the U.S. economy is clearly slowing; the data is not looking great," he said. "The Federal Reserve will be forced to cut interest rates at some point. Long term, it's difficult to see why you want to sell in this environment."

Commodity analysts at Capital Economics also remain bullish on gold in the long-term because of an expected fall in U.S. interest rates.

"While we do not think that the Fed will cut rates next week, we do expect them to cut rates twice this year owing to a further slowdown in U.S. economic growth," the analysts said. "Indeed, interest rate cuts are one factor that we anticipate will support the price of gold this year."

The Final Say

While all traders and investors will be eagerly awaiting next week's Federal Reserve monetary policy decision, there are enough data reports on the docket next week to generate its own market volatility.

Some of the highlights include regional manufacturing data from the New York Federal Reserve and the Philadelphia Federal Reserve, June consumer confidence data and home construction numbers for May.

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.