[Au Price]Subtle Changes To Fed Statement Could Be Gold Negative – Analysts

By Paul Ploumis 29 Jul 2015 Last updated at 06:16:38 GMT

(Kitco News) - With markets pricing in an interest rate hike later this year, economists and analysts are expecting the Federal Open Market Committee (FOMC) to be fairly tight-lipped on trajectory of future monetary policy Wednesday.

However, there are expectations that subtle changes in the central bank’s monetary policy statement could set the stage for a rate hike as early as September.

Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, said in a recent interview with Kitco News that investors should look for the changes in the first paragraph of the statement.

In the previous statement, the central bank said the economic activity has been “expanding moderately” and the underutilization of labor market resources have “diminished somewhat.” Tchilinguirian explained that stronger, more positive adjectives could signal a rate hike in September.

He added a hawkish tone in the monetary policy statement would be negative for gold. BNP has been extremely bearish on gold prices as they expect interest rates to move higher in a low inflationary environment.

Analysts from Bank of America Merrill Lynch are also expecting gold prices to suffer in the near-term as the Fed sets up to normalize rates in September.

“Rising nominal rates and disinflation have created the most bearish cocktail for gold in the past 43 years. As such, we reiterate our view that gold prices are unlikely to rally into a Fed tightening cycle and now believe gold could dip below $1,000/oz by 2016,” the bank wrote in a report published Friday.

TD Securities is also calling for a September rate hike; however, the analysts admit that their confidence is not “exceptionally high.” Gennadiy Goldberg, U.S. strategist at TDS, said that bond markets have priced in less than a 50% chance of a September move.

“Arguably the biggest risk this week remains that the Fed falls short on hawkishness and only chooses to signal rate hikes in the July minutes, with a ‘not hawkish enough’ July statement potentially leading the market to push back rate hike pricing in the near-term,” he said in a note to clients, Monday.

Colin Cieszynski, senior market strategist at CMC Markets, agreed that markets have overpriced a hawkish July FOMC statement. He added the gold market has more to gain on a dovish statement than it has to lose on a hawkish statement.

“Currencies and gold are expecting a hawkish Fed Wednesday and the surprise would be for the Fed to hold the line and be slightly dovish,” he said.

However, although gold could bounce following dovish comments from the central bank, Cieszynski noted that it doesn’t change the fundamental downtrend. If the Fed doesn’t signal a rate hike in September, they still have two meetings - October and December - to pull the trigger and it doesn’t change the outlook that rates will be going higher before the end of the year, he said.

“I don’t think a rally following the FOMC will be the bottom in gold. I think it will be a tradeable bounce but ultimately prices are headed lower,” he explained.

TDS also said it is a matter of time before gold tests below $1,000 an ounce with the trigger being a rate hike, whether it comes in September or December.

“Gold faces considerable risk of dropping below the $1,000/oz mark for at least a short period in the several months before and after the Fed pulls the trigger on lifting the Fed Funds rate,” said Bart Melek, head of commodity strategy for TDS, in a report published Friday.

Courtesy: Kitco News