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Gold Prices Holding Their Ground As Markets Continue Rate Cut Debate - Analysts

Kitco News

(Kitco News) - The Federal Reserve’s monetary policy statement is 10 days away and the debate has continued to rage regarding whether the central bank will cut interest rates by 50 or 25 basis points, and according to some analysts, gold is one of the winners as chaos dominates market sentiment.

The gold market is heading into the weekend trading just off a fresh 6-year high, after New York Federal Reserve president John Williams said that central bankers need to act quickly and lower interest rates at the first sign of economic distress.

Market expectations for a 50-basis point cut rose sharply to a 60% chance, according to the CME FedWatch Tool. The New York Federal Reserve, through a spokesperson, tried to walk back William’s comments saying that he wasn’t talking about current monetary policy but that it was an “academic speech on 20 years of research.”

Since the clarification, market expectations, according to the CME, have fallen back down to a 36.9% chance of a 50 bps move.

Although gold has fallen from its highs following the unprecedented “walk back”, prices are still seeing gains for the week. August gold futures last traded at $1,4257 an ounce, up 1% from last week.

Looking ahead, some analysts have said that the argument between a 50 or 25 bps cut is a debate in semantics, and gold will continue to do well in an environment of falling interest rates.

“I think we should see a continued a slow burn in gold to the upside,” said David Madden, market analyst at CMC Markets. “I think the Fed could cut rates by 25 basis and leave the door open for future rate cuts.”

Carsten Fritsch, precious metals analyst at Commerzbank, said that although there is a risk of some profit taking following’s gold’s latest rally, the environment is still bullish for gold.

Christopher Vecchio said that while he expects at least 50 basis-points of easing from the Fed, he doesn’t expect it all to come in July. He added that the central bank will still be cautious as it protects the domestic economy from slowing global growth.

However, he added that he still sees room for gold prices to move higher.

“As long as U.S. real interest rates continue to move lower, gold will continue to do well,” he said.

Unlikely The Federal Reserve Will Cut Rates By 50 Basis Points

Although markets are pricing in a significant chance of aggressive market action on July 31, many economists still think it’s an unlikely scenario as the U.S. economy is relatively healthy.

Some economists have noted that the Federal Reserve has actually never cut interest rates in an environment of decent economic growth, with strong employment.

“Looking through all the recent noise, we still think the Fed will cut 25 bps on July 31 and then will wait to see how things pan out for the economy in H2 rather than rushing into another rate cut,” said market analysts at Brown Brothers Harriman.

Ross Strachan, senior commodities economist at Capital Economics, said that aggressive monetary policy at the end of the month isn’t in line with relative economic strength showing up in recent data. He added that gold prices could retest $1,400 an ounce in the near-term as the Fed cuts rates by only 25 basis points.

However, he also said that gold prices should hold that level if the U.S. central bank keeps the door open for more easing through the rest of the year.

Colin Hamilton, commodity analyst at BMO Capital Markets, said that he also thinks the Federal Reserve eases by a quarter of a percent.

“I think the Fed still wants to give markets a sense that they are still in control,” he said. “I think $1,400 represents a solid trading level for gold as we wait and see the wider direction of monetary policy cycle.”

Phillip Streible, senior market analyst at RJO Futures, said there is a risk of lower gold prices in the near-term as gold has fallen sharply from its latest six-year high. However, he added that he is optimistic that prices will remain in an uptrend.

“Right now it’s like we are at a wedding and we are waiting to see if the bride walks down the aisle or bolts out the doors,” he said.

Economic Data Could Set The Tone For Fed Decision

Although next week is relatively light on economic data, it is now without some major reports. Next Friday, markets will get the first look at second quarter U.S. gross domestic product data. If the data shows resilient strength in the U.S. economy, markets could continue to shift their interest rate expectations.

“The strength of the incoming hard data for June, as well as the improvement in the early regional survey data for July, does suggest that growth might not be quite as bad as we previously feared,” said economists at Capital Economics in research note Friday.

Is Silver The Metal To Watch Next Week?

While investors continue to focus on gold prices, attention is starting to turn to other value in the precious metals market, in particular silver, which saw incredible gains and hit a 13-month high.

September silver futures last traded at $16.20 an ounce, up 6% on the week. The precious metal is seeing its best percentage gain in three years.  The rally in silver has pushed the gold-silver ratio from last month’s high of 93.44 to 87.04.

For some analysts, silver’s momentum is just starting to pick up as it has significantly underperformed gold for the last few years.

“I think silver has a little more torque to it compared to gold,” said Hamilton.

Fritsch said that he is not surprised to see silver’s rally, adding that it is about time the metal has caught up to gold.

However, other analysts are warning investors to use caution when it comes to silver.

Vecchio said that while this past week’s rally has been impressive, silver is still not attractive as gold.

“Silver is a lot more speculative in nature so there is more volatility,” he said. “I think there are still a lot of global growth concerns that could weigh on silver industrial demand and weigh on sentiment.”

Levels To Watch

Gold’s latest price surge is raising support for the precious metal, with many analysts saying they now expect gold prices to trade between support at $1,400 and $1,440 an ounce.

Vecchio said that that because of the markets strong momentum, he expects that dips will continue to be bought. He added that he is watching support at gold’s 21-day exponential moving average, which comes in around $1,403.

“Gold prices haven’t closed below the daily 21-EMA since May 30,” he said. “As long as we hold above that one-month moving average, gold looks strong.”

The Final Say

Although investors are eagerly waiting the Federal Reserve’s monetary policy meeting at the end of the month, next week the European Central Bank will release its monetary policy decision. According to some economists, the ECB could signal that it is looking to lower interest rates in the near-future.

“We look for the ECB to ease via words for now, but setting up for deeds in Sept,” said economists from TD Securities.

However, a dovish ECB stance might not be very positive for gold, as the U.S. dollar could end up rallying against the euro.

In the U.S., ahead of Friday’s second-quarter GDP data, markets will receive some housing sales data, preliminary manufacturing and service sector data and durable goods numbers.

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.