Gold Market To Take Cue From Tone Of FOMC; No Rate Hike Expected

By Paul Ploumis (ScrapMonster Author)

April 25, 2016 02:33:33 AM

(Kitco News) - Gold traders will be watching next week to see if a post-meeting statement from the Federal Open Market Committee does anything to change the market’s view that policymakers are dovish.

If not, then the good times may well continue for gold, observers said. So far in 2016, the Federal Reserve has taken its foot of the gas pedal of monetary tightening, and gold has surged as a result. It’s a turnaround from late 2015 when the first rate hike in nearly a decade sent gold to several-year lows.

“The focus will be the Fed next week – whatever (Chair Janet) Yellen says,” said Daniel Pavilonis, senior commodity broker with RJO Futures. “That will be the driving factor in gold.”

Gold was higher for most of this week before finishing roughly flat. Around 1:40 p.m. EDT, Comex June was down $5, or 0.4%, for the week to $1,230.80 an ounce. May silver had a better week, rising 66.5 cents, or 4.1%, to $16.92 and Thursday hitting an 11-month high of $17.72 an ounce.

Retail investors remain bullish on gold for next week, although market professionals are more mixed, according to a pair of Kitco surveys. An online survey shows that 72% of 602 retail investors anticipate higher prices. However, of 18 market professionals who responded, five (28%) said they are bullish, and the same number are neutral. Eight (44%) said they are bearish.

The FOMC meets Tuesday and Wednesday. Gold draws support when interest rates are low since this tends to hold back the U.S. dollar, plus it reduces the so-called “opportunity cost” of the metal, or missed interest income from instead holding a non-yielding asset such as gold.

Financial markets are not expecting a change in U.S. interest rates next week.

“The March FOMC meeting minutes effectively ruled out the possibility of an April hike as it ‘would signal a sense of urgency they (participants) did not think appropriate,’” said a research note from BNP Paribas. “The committee still has scope to influence financial conditions next week with its words, but we don’t think a sharp adjustment is in the cards. Explicitly signaling action in June would likely shock markets, which currently see about 20% odds of a mid-year hike.”

Still, economists said, the central bank will want to keep its options open.

“It will be a focus because if there is any indication of a change in their dovish attitude, that would have an effect on the market,” said Bill O’Neill, one of the principals with LOGIC Advisors. “We will also be watching the dollar. If the dollar gets extremely strong, there could be some selling pressure as well.”

Pavilonis suggested there is potential for policymakers to hint at more tightening. He pointed out that crude oil has rallied off the longtime lows from early in the year, which means at some point inflation could start to become more noticeable.

O’Neill, however, commented that he looks for the Fed to remain cautious about tightening beyond the single 25-basis-point rate hike made back in December, and he also looks for more gains for gold ahead.

Yet another market watcher -- Nick Exarhos, senior economist at CIBC World Markets -- said that investors might not see a major move in the gold price even if the Fed does not change anything.
“A lot of Fed dovishness is already priced in, so I don’t see potential for a significantly weaker U.S. dollar or higher gold prices,” he said.

Because of renewed economic weakness in the first quarter, CIBC has pushed back its expectations for the next interest-rate hike until September. However, the fact that the Fed will eventually raise interest rates will keep the U.S. dollar supported and limit gold gains, he said.

“We are expecting to see a recovery in the second quarter but we won’t get the data before the June meeting, which is why we pushed back the next rate hike until September,” Exarhos said. “We think the labor market is leading economic growth, so we expect to see the economic activity to catch up to the strength in the labor market.”

Besides immediate Fed action and statements, traders also monitor economic data, which of course is what ultimately influences policymakers. Major reports next week include new-home sales Monday, durable-goods orders and consumer confidence Tuesday, and jobless claims and gross domestic product Thursday. Personal income and spending, the Chicago Purchasing Managers Index and consumer sentiment are all due out next Friday.

The Bank of Japan also meets next week. The BOJ has introduced negative interest rates, although Nomura said it does not look for additional easing until July.

“The Bank of Japan continues to be accommodative,” O‘Neill said. “The interest-rate structure is going to be bullish for gold.”

Traders will be keeping an eye on exchange-traded-fund holdings of gold and silver, O’Neill added. Both have risen so far this year and are watched as a proxy for investment demand. The ETFs trade like a stock but track the price of the metal, with gold and silver put into storage to back the shares.

O’Neill commented that the cycle for commodities has turned higher generally, which his firm called for in January. “That’s certainly helping metals,” he added.

Courtesy: Kitco News