By Paul Ploumis (ScrapMonster Author)

March 16, 2016 05:11:01 AM

(Kitco News) - The Federal Open Market Committee kicks off its two-day meeting and analysts are expecting to see continued weakness in gold prices ahead of the central bank’s latest monetary policy decision.

April Comex gold futures are down almost 1% on the day, last trading at $1,232.70 an ounce, as investors and traders position themselves ahead of the much anticipated monetary policy statement, updated economic forecasts and Fed Chair Janet Yellen’s press conference on Wednesday.

According to analysts, the key support level to watch will be $1,220 an ounce; a break of this level could lead to a test of the psychological barrier at $1,200 an ounce.

In a report released Monday, commodity analysts at TD Securities said that they raised their stop-loss level to $1,225 in anticipation of the Fed announcement.

“We have been long gold for a very long time so we wanted to raise our stop-loss to protect some of our profits,” said Mike Dragosits, senior commodity strategist at TDS.  “If we break below $1,225 then I think we could see $1,200 fairly easily.”

Although TDS is preparing for the worst, Dragosits added that their base case is for gold to hold its current gains. Although the Fed is expected to keep the door open for a possible rate hike later in the year, Dragosits said that they are expecting the central bank and Yellen to strike a dovish tone on Wednesday.

“Gold won't likely see a reduced shine until it is assured that the global economy has stabilized, the U.S. economic growth gets back on track more broadly, and the Fed begins signaling greater intent to raise rates further,” TDS said.

Phillip Streible, senior market strategist at RJOFutures, agreed that key support will be around $1,220 and that there is strong possibility that prices end up falling to $1,200 an ounce, an area of concern for some investors.

“If we go through $1,200, I think it could get ugly pretty quick and a lot of guys who were long could throw in the towel,” he said.

Streible added that he thinks the Fed could be more hawkish than expected, and traders should prepare for a drop to $1,200 in reaction to the statement.

“I think the Fed could signal that some of the global issues have been isolated and that they don’t see any contagion fears,” he said.

Currently, there is only a slim possibility that the Fed raises interest rates tomorrow -- according to the CME group, Fed Fund Futures are pricing in zero percent chance of a rate hike. But, analysts say that the tone of the statement and Yellen’s press conference will have a major impact on gold prices.

Julian Jessop, head of commodity research at Capital Economics, said that they are expecting gold prices to fall in the near-term as the Fed signals fairly clearly that they are going to raise rates sooner rather than later. He added that there is a possibility the Fed hikes as early as April, but sees the June meeting as more likely.

Although gold prices could fall on the news, Jessop added that they remain confident that gold prices will once again regain their footing afterwards.

“It’s not surprising that markets are a little nervous ahead of the meeting but once they get a clear picture we could see gold move higher in ‘sell-the-rumor-buy-the-fact’ move,” he said. “I think this is going to be a temporary correction and gold will pick up as inflation concerns start to rise.”

Looking past the Fed, Dragosits said that if their stop-loss is triggered, the bank might not jump into the gold market again. He explained that they would have to assess market conditions.

“If prices break below $1,225, I don’t think it is an automatic re-entry,” he said. “I think you have to look at the incoming data, particularly consumer data. If things like consumer spending remain weak then I think it will force the Fed to abandon its rate hikes and that will be good for gold.”

Courtesy: Kitco News