By Paul Ploumis 16 Sep 2015 Last updated at 02:44:41 GMT
(Kitco News) - Gold traders and investors are laying low as financial markets countdown to Thursday’s Federal Open Market Committee (FOMC) monetary policy decision. According to some precious metals analysts, the best long-term move for the gold market would be if the Fed raised interest rates.
The September central bank meeting has been one of the most anticipated in recent history as this could be the first time the central bank raises interest rates since June 2006; it has been more than six years the central bank has kept rates in its unprecedented zero bound range , maintaining an interest rate band between 0.25% and 0%.
Currently, The Fed-fund futures market, a proxy for interest-rate expectation, is pricing in close to a 25% chance that the central bank pulls the trigger Thursday; however, economists are a lot more conservative, with many calling the decision a flip of a coin, putting the odds at 50/50 for a hike.
“The cumulative improvement in the economy over the past few years means that it is almost impossible to justify interest rates still being at near-zero. Nevertheless, a number of Fed officials clearly want to use the recent volatility in financial markets as a reason to delay the first rate hike yet again,” said Paul Ashworth, chief U.S. economist at Capital Economics, in a recent report.
Although it could be a close decision, analysts at TD Securities suggested in a recent report that the doves on the committee, those who support looser monetary policy, could have a slight advantage, which is why the bank is expecting the Fed to maintain its current monetary policy.
Millan Mulraine, deputy chief of U.S. macro strategist at TDS, argued that the current conditions of financial markets does not warrant higher interest rates. “The risk that market volatility and tighter financial conditions will slow economic growth and delay the recovery in underlying inflation warrants more caution,” he said. “The Fed will continue to express its desire to hike which will result in a hawkish tone by keeping every meeting live.”
Economists at Nomura also said they expect that the fragile global markets will force the U.S. central bank to wait in the sidelines at this meeting, adding that the committee will want to see more evidence that the economy can withstand the impact of higher interest rates. Along with the monetary policy statement, Nomura economists also warned investors and traders to pay attention to the Fed’s updated economic projections and interest rate expectations, also known as the dot plots.
“At a minimum,we expect the Committee’s forecast for 2015 to coalesce on one hike this year,” they said. “We do not expect the Committee to endorse a more rapid pace of interest rate adjustment after liftoff. Consequently, the delay in liftoff should imply a lower path of rates over the whole forecast horizon. We also think that the downward adjustment of the rate path is consistent with the recent tightening of financial conditions.”
The question now becomes where does that leave gold?
Many analysts have noted that gold has been far more aggressive in expecting interest rate hikes, with prices hovering just above $1,100 an ounce. However, while the metal could see a bounce with the Fed leaving interest rates unchanged, it might be short lived as the central bank is still expected to keep a move in December on the table.
“The Fed has left rates unchanged all year and gold is still in a big down trend,” said Ted Sloup, senior market strategist at iiTrader. “We are waiting for a catalyst that will push gold higher and we just don’t have it yet.”
Sean Lusk, director of commercial hedging at Walsh Trading, agreed that a rally would be short-lived..
Colin Ciesznski, senior market strategist at CMC Markets, said in a recent interview with Kitco News, that he is bearish on gold prices in the near-term. Even if they don’t raise rates at this meeting, Fed Chair Janet Yellen could take a hawkish stance at her press conference and signal that rates will move higher in October or December.
In fact, among analysts, the best scenario for the gold market would be for the central bank to hike rates in September, although prices could fall to long-term support at $1,080 an ounce, it could be the contrarian view many have been waiting for.
Bernard Dahdah, precious metals strategist at Natixis, said that he could see gold prices fall to $1,050 an ounce in reaction to the Fed hiking rates Thursday.
Both Sloup and Lusk said at that level they would be looking to go long on a “pure contrarian play.”
Adrian Day, president of Adrian Day Asset Management, said in an email to Kitco News that it may take a week or two for the market to digest the impact of a rate hike, but agreed that it could be bullish for the yellow metal.
“An increase would be modest and the market would give a sigh of relief that the long-awaited threat of higher rates is behind us and of no consequence,” he said.
Courtesy: Kitco News