Wednesday May 31, 2017 11:38
(Kitco News) - The gold market is headed for its second neutral monthly close since December, but one firm sees potential for the yellow metal despite a looming U.S. interest-rate hike.

In a report Wednesday, Ole Hansen, head of commodity strategy at Saxo Bank, said that he sees potential for gold prices to push above $1,300 an ounce next month as the Federal Reserve hikes interest rates for what could be the last time this year.

“We see further upside to gold, with a risk of a dovish U.S. rate hike on June 14 and continued support from political risks related to elections in Europe and uncertainty around U.S. President Donald Trump,” he said.

The move Hansen is expecting to see would be similar to what happened following the Federal Reserve’s March monetary policy decision, which analysts saw as a “dovish hike.” The central bank raised interest rates by 25 basis points but strongly emphasized the gradual trajectory and a “quite low” neutral Fed funds rate.

Currently, a June rate hike is pretty much widely expected, with 30-day Fed fund futures pricing in a 91% chance, but the outlook for a third move at the end of the year remains uncertain. Markets are pricing in a less than a 50% chance of a third hike by the end of December. Analysts have noted that hesitancy for a third rate hike this year could be positive for gold.

Hansen said that he sees gold’s key resistance level at $1,280 an ounce and a break of that level could lead to a push above $1,300 an ounce.

“We prefer to express the bullish view through options by entering a 1280/1300 call spread, expiry on July 26. Current open interest in Comex August gold call options has centered around the $1,275 and $1,300 strikes,” he said.

Breaking down the trade, Hansen said that recommends buying August $1,280-per-ounce call option for a price of $14.60 per ounce

At the same time investors need to sell the August $1,300 ounce call for a credit of $8.60 an ounce. The cost and total risk of this trade would be $6 per ounce, with the potential for a total gain of $20 per ounce.

Hansen’s recommendation comes as gold futures push to a one-month high, with August gold futures last trading at $1,270.70 an ounce, up 0.40% on the day.

By Neils Christensen
For Kitco News