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Buy Precious Metals Dips: Fed Skewed 'More Aggressively Dovish' - Scotiabank

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Buy Precious Metals Dips: Fed Skewed ‘More Aggressively Dovish’ — Scotiabank

(Kitco News) - Gold’s near-term price action hinges on trade risks and market expectations surrounding the Federal Reserve’s September move, according to Scotiabank.

The yellow metal confirmed its “statement breakout” as it moved above $1,500 an ounce on heightened geopolitical concerns, trade worries, global monetary policy easing, Federal Reserve rate cut expectations, and fear of a currency war, Scotiabank bank said in its August update.

“Gold’s sharp repricing this summer, in both U.S.$ terms and versus other fiat currencies, continues to verify it’s a statement breakout; it highlights a macro regime shift and proved to investors that it has adapted to be a reliable geopolitical hedge, a trade policy hedge, a rate cut hedge, and a currency war hedge,” Scotiabank commodity strategist Nicky Shiels wrote.

Global markets are still very much focused on these risks, which is why gold is above the $1,500 an ounce levels. December Comex gold futures were last at $1,529.20, up 0.09% on the day.

Following the Fed’s 25-basis-point cut in July, the U.S.-China trade war tensions escalated, to which gold responded with a rally.

“The Fed’s reaction function – trade – is being utilized & actively weaponized to achieve lower rates. Even if U.S. data improves (thus defending ‘one-&-done’ Fed cut calls), the overhang and threat of further tariffs also just increases. A 50bp Fed rate cut in September or an intermeeting cut are now no longer tailrisk options,” Shiels said.

Markets are currently pricing in a 69.6% chance of a 25-basis-point rate cut and a 30.4% of a 50-basis point rate cut, according to the CME FedWatch Tool.

The trade tensions that came almost immediately after the Fed’s rate cut have skewed the market’s perception of the Fed towards a more dovish one.

“While the Fed didn't cut 50bps, the irony is that the subsequent pricing response in yields and gold (yes, because of escalating trade tensions) indicates they basically did … Both ‘trade risk’ and ‘Fed risk’ has never been this unpredictable in the few days following the FOMC, which skews the Fed more aggressively dovish and ensures havens remain the preferred asset unless theres another game-changing policy response,” Shiels said.

Gold’s new floor is now at $1,400 an ounce and further upside above $1,500 an ounce depends on how aggressive the Fed cuts rates this year and if there is additional volatility in the equity markets. However, a trade ceasefire and better-than-expected U.S. macro data could pressure gold back to the $.1350-$1,450 range.

In this environment, the base case scenario might be to buy the precious metals, including gold, on dips, Scotiabank’s report added. “Macro regime of higher volatility floors, lower for longer yields, a hunt for (yielding) quality. IE: buy (precious metals) dips, sell (base/growth/industrial) rallies,” Shiels wrote.

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