Bullish Or Bearish: Gold's Next Trend Is Up To The Fed
(Kitco News)- In what has been a familiar theme for the gold market, itsnext trend could be determined in a single day next week, depending on what theFederal Reserve says on future monetary policy.
The gold market has been stuck in neutral around thecritical psychological level at $1,200 an ounce for the last five weeks aheadof an all-but-guaranteed 25 basis-point interest rate hike. Comex December goldfutures last traded at $1,202.40 an ounce, up 0.11% from the previous week.
While some analysts have described gold’s recent priceaction as boring, others see the market as a coiled spring, building a base asit waits for sentiment to shift. Many analysts have said the gold market, whichhas dropped almost 12% from April, has fully priced in the Federal Reserve’scurrent monetary policy trajectory and is now primed to see a relief rally.
“The market is coiling well and we just need a catalyst tospark a rally and that could come from the Fed,” said Bill Baruch, president ofBlue Line Futures.
According to some commodity analysts, the Federal Reserve’sview on where it sees neutral interest rates will be crucial to gold’s nexttrend.
What Is The NeutralRate?
In basic terms, the neutral or natural rate is whereequilibrium is found in the economy where monetary policy is neitherstimulative nor restrictive. The Federal Reserve itself sees interest ratesapproaching that neutral territory, according to discussions at the previousmonetary policy meeting.
“Participants noted that the federal funds rate was movingcloser to the range of estimates of its neutral level,” said the Minutes of theJuly monetary policy meeting.
However, economists and analysts want to see if thatsentiment has changed as inflation continues to heat up and the U.S. labormarket remains at full employment.
“The fed has no reason to be more hawkish than it alreadyis,” said Baruch. “I think Powell will want to keep an even keel as thereis growing uncertainty in the U.S. economy. We’ve had a strong summer ofeconomic growth, but this pace isn’t sustainable.”
Jasper Lawler, head of Research at the London Capital Group,said that gold prices have been dragged down because of surging momentum in theU.S. dollar as markets have been pricing in aggressive monetary policy actionfrom the U.S. central bank. However, he added that that particular trade isrunning out of steam and could potentially reverse next week.
“After the strong rally we have seen in the U.S. dollar themarket needs something more than Fed’s current steady path for interest rates,”he said. “From a risk/reward standpoint, the gold market looks good at theselevels.”
The U.S. dollar has struggled to find momentum in this past week as prices fell to a 3-month low. The U.S. dollar index last traded at 94.26, down almost 1% from the previos week.
George Gero, managing director at RBC Wealth Management,said rising bond yields highlights a growing risk that the central bank shiftsits neutral outlook. 10-year bond yields are trading at 3.07%, its highestlevel since mid-May.
So far this month 10-year bond yields have risen nearly 8%.
Can’t Rule Out LowerPrices In the Near-Term
Ronald-Peter Stoeferle, fund manager at Incrementum AG, saidthat although he thinks gold is attractive at current levels, he can’t rule outlower prices in the near-term.
He said that there is a risk that the Federal Reserveincreases the outlook for where it sees neutral interest rates as the U.S.economy remains active with the labor market at full employment and equitymarkets pushing to new record highs.
“The Fed will continue to raise interest rates as long asequity markets keep going up and that will keep a lid on gold,” he said.
However, Stoeferle said that it is only a matter of timebefore gold prices rally as monetary policy raises the risk of a recession.Long-term he said that he sees a toxic environment for the U.S. economy asinterest rates rise, the Fed quickens the pace to lower its balance sheet anddeficits grow out of control.
“I think gold could continue to build a base for a littlewhile longer but the stronger the base, the higher space,” he said. “Gold willbreak out when investors and markets realize that a recession is looming.
“We are at the stage of the party where things are gettingcrazy just before someone calls the cops and the party comes to a crashingend,” he added.
Stoeferle added thatbearish speculative positioning and negative sentiment at record highs, the setup for higher gold prices in the last 16 or 17 years.
In a report Friday, Andrew Hecht, creator of the HechtCommodity Report, said that a hawkish tone from the Fed next week could sendgold prices back down to its recent lows at $1,180. However, a dovish tone thatputs rate hikes in doubt in 2019 would push prices back above $1,220 an ounce.
“I am sitting on the sidelines in gold but prepared to gowith the trend if it breaks below $1,180 or above $1,220 per ounce next weekand beyond,” he said.
Baruch said that he is long gold at current levels and isusing options contracts to manage his position and risk.
Levels To Watch
Because gold has been stuck in a narrow rangefor the last five week, many analysts say that the critical levels to watch arestill in place. For many analysts the first significant resistance level comesin around $1,236; on the downside, gold needs to break last month’s low at1,180.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com 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.