Kitco News Weekly Outlook: Gold Prices Will Be All Up To The Fed
(Kitco News)- After months of speculation, thebig show is almost here and for gold investors, this could be the metal’s bestshot to break out of its current range, according to some analysts.
In fact, this is probably themost straight-forward weekly outlook a financial journalist could write becausethe only thing investors are watching next week is the Federal Reserve’smonetary policy meeting.
Ole Hansen, head of commoditystrategy, noted that the meeting comes as gold trades in its narrowest range since 2012. Heexplained that opposing forces have neutralized gold’s momentum for now;geopolitical uncertainty is providing critical support while the threat ofrising interest rates weighs on prices.
The gold market is preparing toend its fourth week of losses as prices test the lower end of its tradingrange. April gold futures last traded at $1,311.50 an ounce, down almost 1%from the previous Friday.
The silver market is also testingsupport within its recent trading channel as it gives up last week’s gains andthen some. May silver futures last traded at $16.255 an ounce, down 2% from theprevious week.
Although silver continues tounderperform gold, many analysts remain optimistic that prices will rally laterin the year.
Looking at U.S. monetary policy,analysts say there is no doubt that interest rates are moving higher next week.Markets see a 25-basis-point hike as all but guaranteed. The question that hassidelined gold investors has been the number of interest-rate hikes for therest of the year. Investors are anxious to see how hawkish the central bankwill be.
“Inflation is running high enoughthat the Fed will not be dovish. It’s now a question of how hawkish they willbe,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.“I think the Fed is going to raise its forecasts next week and that willsupport the U.S. dollar and hurt gold prices.”
However, Hansen said that he isbullish on gold prices next week as he expects the central bank will strike aneutral tone.
The key for gold investors willbe the Federal Reserve’s projections. In the December forecast, the medianestimate called for three rate hikes this year; however, expectations haveslowly been growing that the Fed will hint at four rate hikes this year.Markets are currently pricing in a 26% chance of four rate hikes being signalednext week.
Jasper Lawler, head of researchat London Capital Group, said that he sees slightly more risks of a hawkishFed, especially after Fed Chair Jerome Powell’s testimony before Congress lastmonth. In this scenario, he said that it will be difficult for gold to rally.
“Powell’s testimony was prettyhawkish and since then, we have fairly positive economic data. That should givethe Fed some confidence to be hawkish,” he said. “I think we see lower goldprices next week, but maybe gold needs to move lower to attract investorinterest again.”
Not all analysts are convincedthat the Federal Reserve will signal four rate hikes next week.
TD Securities noted that whilethe economy continues to grow, inflation is not hot enough to merit aggressiveaction from the central bank.
“Fed officials should soundsomewhat more upbeat at the March FOMC meeting, with the balance of risks nowskewed to the upside. But the median dot is likely to remain at three hikes for2018,” the analysts said in a note.
Ryan McKay, commodity strategistat TD Securities, said that while the U.S. dollar could see some modeststrength next week, the firm sees any weakness in gold as short-term sellingpressure. He added that the fact that interest rates aren’t going up rapidly willhelp push gold prices higher in the second half of the year.
Bloomberg Intelligence's MikeMcGlone said in a recent webinar that gold investors shouldn’t fear interest-ratehikes, whether it is four or three.
“The only reason the Fed israising rates is because of rising inflation,” he said. “Inflation is going upand that is good for gold.”
It’s Not Completely About The Fed; Geopolitical Concerns, Dollar AtPlay
Even if the gold market is hitwith a hawkish Fed, some analysts are not quite ready to throw in the toweljust yet. Gold has managed to hold critical support levels, despite the threatof higher interest rates, because of ongoing geopolitical turmoil, especiallyfrom Washington D.C.
Recently, the Donald Trumpadministration shook financial markets after the president fired -- andannounced over Twitter -- Secretary of State Rex Tillerson and replaced himwith Central Intelligence Agency Director Mike Pompeo. There is ongoingspeculation that Trump is also looking to replace national security adviser Lt.Gen. H.R. McMaster.
Along with geopoliticaluncertainty, many analysts see signs that the U.S. dollar is heading into along-term bear market. McGlone said that the greenback will be a crucial driverfor gold prices. He added that diminishing returns for the U.S. dollar, despiteFed tightening, is bullish for the yellow metal.
“Inflation is increasing and theU.S. dollar is weakening. This is a great environment for gold,” he said.
Levels To Watch
For the past month, gold priceshave been caught in a range between $1,300 and $1,340 as the market has awaitedguidance from the Federal Reserve.
While Lawler is looking for goldprices to drop next week, he said that he is not expecting prices to fall muchbelow the 200-day moving average, which comes in at $1,298 an ounce.
Lawler said that although he isbearish in the near term on gold, he sees long-term potential as investors lookfor safe-haven alternative investments.
“I think for gold to really shinethis year, we need to see more volatility in equity markets,” he said. “I thinkgold still has a chance to push higher this year as there is a lot ofuncertainty hanging around.”
Chris Beauchamp, market analystat IG, said that gold’s technical picture looks bearish and a solid break below$1,314 an ounce could signal a move to $1,295 an ounce.
On the upside, a lot of analystsare looking at initial resistance at $1,340 an ounce but for many, gold needsto break the 2016 highs around $1,375 to breathe new life into the marketplace.
The Final Say
Oh yeah, the Bank of England isalso holding a monetary policy meeting the day after the Fed.
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.