FOMC Meeting Will Dominate Gold Market Next Week
Washington (Sept 12) Next week’s two-day Federal Open Market Committee meeting will dominate gold and financial market action, as participants look to see what might be said regarding the future of U.S. monetary policy.
December gold futures fell Friday, settling at $1,231.50 an ounce on the Comex division of the New York Mercantile Exchange, down 2.8% on the week. December silver rose Friday, settling at $18.599 an ounce, down 2.8% on the week.
In the Kitco News Gold Survey, out of 37 participants, 24 responded this week. Of those, five see higher prices, 18 see lower prices and one sees prices trading sideways. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.
Prices fell this week, pressured by a rising dollar ahead of the FOMC meeting which ends Wednesday.
Robin Bhar, head of metals research at Societe Generale, said there was a shift in expectations of Fed rate hikes this week, spurred by a paper published by the San Francisco Fed, which suggested market expectations of rate hikes were more dovish than FOMC projections.
“It was really an eye-opener,” Bhar said. “Immediately afterward we saw the two-year (U.S. Treasury) rate rise.”
That added to the recent dollar strength, which also weighed on gold, he said. The dollar index rose to its highest level since July 2013 this week.
Analysts at Standard Chartered said while the paper from the San Francisco Fed wasn’t news, what changed is that “the (financial) market is now mulling over whether the note should be seen as a signal for a possible change in Fed rhetoric at … (the) FOMC meeting. Chair (Janet) Yellen’s background as a former president of the San Francisco Fed is seen as particularly telling on this front.”
Bhar said if there is a sense the Fed may pull forward interest rate hikes from the current consensus view of June 2015 for the first increase, that perception could weigh on gold.
Bob Haberkorn, senior commodities broker with RJO Futures, concurred. “It looks like it (gold) has further downside with the strengthening dollar coupled with the outlook for U.S. interest rates,” he said.
Haberkorn said he doesn’t expect the Fed will move interest rates this year. “But the fact that it’s looming over the metals market should put pressure on it for the remainder of the year, if no major geopolitical situation rears its head between now and the end of the year,” he said.
Gold has had little reaction to geopolitical events, having stumbled despite news this week that President Barack Obama called for airstrikes against the Islamic State.
Kevin Grady, president of Phoenix Futures and Options, said that’s a bearish sign for gold. “All the news out there for gold could be bullish — Russia, Syria, Iraq — and gold is down. Crude oil is down,” he said.
Gold has fallen through bottom of the $1,240-$1,330 an-ounce range that had held for several months. Haberkorn sees some chart support around $1,220 and added that $1,200 level will be a major floor.
Physical buying in the gold market remains lackluster at best and Bhar suggested the big drivers of gold demand – China and India – may be well-supplied for now after last year’s shopping spree.
“The premiums seen in Shanghai, Mumbai and Hong Kong are not much above loco London,” he said, which is a sign of minimal buying interest.
The seasonal upswing gold normally receives between September and December, driven much by a pickup in jewelry demand ahead of global holidays, has yet to materialize, he said. But that doesn’t mean it won’t. It could just take a move to lower prices, perhaps closer to $1,200 to spur bargain hunters, he added.
Grady agreed that it may take gold prices falling to $1,200 to reinvigorate demand. “With gofo (gold forward) rates positive and rising, it’s a sign there’s so far little demand for physical gold,” he said.
He noted that futures open interest is rising as gold prices are falling, another bearish sign. On Sept. 5, total futures open interest was 377,931 contracts and as of Thursday, the most recent data available, open interest is at 382,693 contracts.
“That’s the one thing that makes me leery about being bearish. The heavy short open interest could leave gold vulnerable to a short-covering rally,” he said. However, he added “so many people have said they’ll just sell it when gold rallies, but we’re not seeing the rallies happen and they’re just coming in to sell it.”
Source: FORBES
