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Gold prices hold up despite falling market calls for rate cut

Kitco News

(Kitco News) - Gold prices are holding above the critical support level of $1,500 an ounce, but selling pressure is starting to weigh on the precious metal as chances lessen for a Federal Reserve rate cut.

According to the CME FedWatch Tool --as the Federal Reserve kicks off its two-day monetary policy meeting -- markets are pricing in less than a 50% chance of a rate cut. Last week markets were pricing in a nearly 100% chance of a rate hike. Traditionally, the Fed has not adjusted interest rates when markets have priced in a less than 50% chance of a move.

There is now growing concern that gold prices could fall below $1,500 an ounce if the U.S. central bank fails to deliver a rate cut Wednesday. December gold futures last traded at $1,514.20 an ounce up 0.22% on the day.

“A rate cut would give gold a boost as the opportunity cost of holding a non-yielding asset falls. Gold could look to target $1,550 under these circumstances,” said Fiona Cincotta, senior market analyst at City Index, in a research note Tuesday. “Should the Fed stay pat on rates and risk the wrath of President Trump, the dollar could push higher and gold decline back towards $1475 level.”

Despite the growing risks to gold prices, some analyst have noted that the precious metal market has held up really well, even in the face of shifting expectations.

“Geopolitical uncertainties have arguably stabilized gold above the psychological $1,500 mark, encouraging a constructive landscape from both a fundamental and technical perspective,” said Bill Baruch, president of Blue Line Futures.

Daniel Pavilonis, senior commodity broker with RJO Futures, said that although gold is searching for a catalyst a rate cut isn’t the only potential spark in the marketplace.

“I think for gold prices to rally its more about what the Fed is going to say than what it does,” he said. “I think a strong affirmative signal that the central bank will continue to support economic growth will help gold prices push higher.”

So far the Federal Reserve has been reluctant to take a strong dovish stance on U.S. monetary policy. In his last comments before the central bank’s self-imposed blackout period, Fed Chair Jerome Powell was fairly optimistic on the health of 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.

In July, following the first rate cut in a decade, Powell described the move as mid-cycle adjustment and pushed back on the idea that the central bank is starting a new easing cycle.

Pavilonis, added that the Fed can’t strike too hawkish a tone Wednesday as it could cause a sell-off in equities, which in turn would be bullish for gold.

“The metals are struggling but the market still looks strong,” he said. “I like the metals and I think we are in a position to move higher as there is still a lot of uncertainty that could weigh on overvalued equity markets.”

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.