Fed, ECB To Define Gold Prices Near-Term - Analysts
(Kitco News)-Gold’s near-term outlook is once again in the hands ofcentral bankers as two much anticipated monetary policy meetings will be heldnext week.
Many analysts have noted that gold has followed awell-established pattern: selling off before an expected rate hike to then riseonce the dust has settled. The question on many investor’s minds is whether ornot this pattern will hold next week as inflation picks up as the U.S. economycontinues to grow at a steady clip.
The market is ending the week in a fairly tight range. August gold futures settled the week at $1,302.70 an ounce, up only 0.26% since last week.
For many analysts, a dovish hike scenario would be the Fedsignaling only on more rate hike this year, which would most likely happen inDecember.
In a recent interview with Kitco News, GeorgeMilling-Stanley, head of gold investments at State Street Global Advisors, saidthat a dovish hike would see gold recapture its lost territory reasonablyquickly. He added that he could see gold back between $1,350 and $1,400 anounce.
“I would expect gold to rebound quite well as soon as theFed announcement is out of the way,” he said. “This June move has been so welltelegraphed that I don’t think it will take longer for the gold market toadjust.”
However, even if the Fed signals only one more rate hikethis year, the timing of the next hike will be essential, according to MartinMurenbeeld, president of Murenbeeld & Co. In an interview with Kitco News,he said that if markets price in a September rate hike then gold might onlyrally $10 for a brief time.
Other analysts are not optimistic that the Fed will embarkon a dovish hike. Colin Cieszynski, chief market strategist at SIA WealthManagement Inc., said that rising inflation along with a growing economy willkeep the Fed on pace to raise interest rates once a quarter through 2019.
“Right now the Federal Reserve doesn’t have much reason tostop raising rates at this point,” he said.
Bill Baruch, president of Blue Line Futures, said that thereare growing risks that the Fed could be hawkish next week as it becomes moreempowered to normalize interest rates as the European Central Bank signals thatthey are moving forward with its plans to tighten monetary policy gradually.
“I think the Fed was hesitant to aggressively hike ratesthis year as the policy divergence was turning out to be bigger than theywanted. But that is no longer the case,” he said.
Tightening In Tandem
While gold could take a hit following hawkish comments fromthe Federal Reserve, Baruch said that there is still a chance for gold torally.
Along with the Federal Reserve, the ECB is holding itsmonetary policy next week. While the ECB is not expected to tighten rates now,economists expect the central bank President Mario Draghi to set the stage fortighter monetary policy later as it looks to end its bond-purchase programlater in the year.
“A hawkish stance from the ECB would strengthen the euro,which would drag down the U.S. dollar and that will ultimately be positive forgold,” said Baruch. “For the gold market, I think there is more upsidepotential in the euro than there is in the U.S. dollar.”
While there is still strong momentum driving the U.S.dollar, there is a chorus of currency analysts that are warning that the marketis overbought and is due for a pullback.
“We think the USD is more inclined to trade with a weakertone in line with our rates expectation and ultimately reliant on the ECBmeeting a few short hours after,” said currency analysts at TD Securities.
Trade Wars Need To Escalate To Support Gold
While gold could get a boost from volatile currency marketsnext week, analysts are not expecting to see the market benefit from safe-havenflows.
While there is unprecedented uncertainty among the Group ofSeven nations -- the seven most significant economies in the world - with theirmeeting in Quebec City this weekend, analysts are not expecting to see majorfireworks.
The meeting comes as the U.S. continues to fight withMexico, Canada, and Europe over trade practices. Countries are looking toimplement trade tariffs on a variety of U.S. products in retaliation to U.S.steel and aluminum tariffs.
While a potential trade war creates some geopoliticaltension, analysts say that it isn’t enough to push gold prices higher.Murenbeeld noted that trade has to significantly weaken the U.S. economy toforce the Federal Reserve from raising interest rates. He added that the crisisisn’t at that point yet.
Cieszynski agreed that the trade issues aren’t bad enough toshake the U.S. economy, which will keep a lid on safe-haven assets.
“There is just so much momentum in the U.S. economy that itcould easily survive these trade disputes,” he said.
Following the G7 meeting, U.S. President Donald Trump willhead to Singapore for a historic Summit with North Korean Leader Kim-Jung Un.
While not much is expected to come out of this meeting,analysts say that event is another example of easing global geopoliticaltensions.
How To Play Gold Next Week
Because of gold’s potential next week, Baruch said that hesees two strategies that could be potential winners. He added that the key isfor investors to control their risks, which is why he prefers to play goldthrough the options market.
He added that he likes the idea of buying short-term callsor using an August call spread. He said that investors can find good value inbuying August $1,320 calls and at the same time sell $1,350 calls.
He also likes buying July $1,320 calls to play the potentialspike in gold following the Fed and ECB rate hikes.
“Through options, your risks are defined, but you havesignificant upside potential,” he said.
Phillip Streible, senior market analyst at RJO Futures, saidthat he is bullish on gold next week and could see prices pushing to $1,320 anounce following the Fed meeting.
The Final Say...
While geopolitics and central bank meetings will be in thespotlight next week, there are other major economic events that investors needto focus on.
On Tuesday markets will receive important inflation datawith the release of May’s Consumer Price Index. Rising inflation, whilesupportive for gold, could be detrimental as it will also support higherinterest rates.
As the ECB holds its press conference following its monetarypolicy meeting, markets will then have to digest May retail sales data. Thisreport will provide a glimpse as to how healthy the U.S. consumer is.
The week ends with the release of regional manufacturingdata.
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.