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Traders waiting to see if gold can hold $1,500 if the fed disappoints

Kitco News

(Kitco News) - Next week, market participants will be keeping a close eye on $1,500 as the first line of defense gold prices have to hold in the near term, according to some analysts.

The gold market is preparing for a third week of consecutive losses; although the market is still in a technical uptrend, pessimism is starting to creep into the market as safe-haven demand starts to weaken.

December gold futures last traded at $1,496.50 an ounce, down more than 1% from last week.

According to some analysts there is scope for further loses in the gold market next week as it is unlikely that the Federal Reserve will fail to meet dovish expectations.

The Fed in Focus

The Federal Reserve will take center stage next week as prepares to adjust monetary policy. According to the CME FedWatch Tool, markets have all but priced in a 25 basis point cut. However, the debate in the marketplace is whether the next rate cut is the start of an easing cycle or another mid-cycle adjustment.

Federal Reserve Chair Jerome Powell has been reluctant to announce the start of a new easing cycle. Last week, just before the central bank's self-imposed blackout period, he was relatively optimistic on the U.S. economy.

"The labor market is still tightening at the margins and the consumer is in good shape. There will be no recession but there are risks that we are monitoring," he said at an event in Zurich, Switzerland.

Ryan McKay, commodity strategist at TD Securities said that a recent spate of average economic data and easing trade tensions have given the Federal Reserve some room to take a more neutral stance on monetary policy.

"There is room for gold to be disappointed," he said.

However, McKay added that he expects that gold prices to continue to hold support around $1,500 an ounce. He said that there are enough risks in the marketplace to keep a solid bid under gold.

"I think any dip would be fairly shallow and bought fairly quickly," he said. "The reality is that there is a lack of safe-haven assets available."

Richard Baker, editor of the Eureka Miner Report, said that he expect gold prices to continue to hover around $1,500 an ounce and any drop below would be bought.

"I believe we are in a short cycle of rising Treasury yields and copper prices that will reverse when hopes fade again on the global trade front," he said. "Gold is on solid footing to rally again but a re-test of the key $1,500-level is likely in the cards for next week."

But it's Also More Than The Fed

Although a rate hike could initially disappoint the gold market, Lukman Otunuga, research analyst at FXTM said that investors also need to take a look at the broader monetary policy picture.

"Central banks across the world including the European Central Bank are easing policy to support their respective economies which is good news for zero-yielding Gold. Lower interest rates across the world coupled with lingering global growth fears and geopolitical risk factors should keep Gold glittering," he said.

Otunuga's comments come after the European Central Bank announced several dovish monetary policy actions, lowering the interest rate on the deposit facility by 10 basis points to -0.50% and restarting a €20 billion monthly asset-purchase program.

Many analysts have said that they remain bullish on gold as negative yielding debt hovering above $16 trillion dollars.

Trade Tensions Thaw But Issues Aren't Resolved

Along with looser monetary policy and growing negative yields, the threat of weaker global growth because of the ongoing global trade war remains in the forefront of many market analysts. Although tensions between the U.S. and China thawed this past week, many analysts note that the problem still remains.

"The Chinese trade situation is not going to end anytime soon," said David Madden, market analyst at CMC Markets.

Charlie Nedoss, senior market strategist at LaSalle Futures Group said that he also expects gold prices to be bought on dips as no major issues have been resolved. He described the easing trade tensions as Nedoss described the situation as "putting a small Band-Aid on a gaping wound."

Levels to Watch

According to some analyst, $1,500 has become an important pivot point to watch; however, others say that gold's uptrend remains firmly in place as long as prices can hold the 50-day moving average, which comes in at $1,485.

Fawad Razaqzada, technical analyst at City Index, said that if that price fails then the next major support level comes in around $1,450.

The Final Say

Aside from the Federal Reserve monetary policy decision, next week is relatively light on economic data. Markets will receive some housing construction data as well as regional manufacturing reports from the New York and Philadelphia Federal Reserves.

Although the Fed will take center stage next week. The Bank of England and the Bank of Japan will also hold their monetary policy meetings next week. Expectations for both central banks to enact easing measures has grown in, according to some economists.

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