Gold Price Ends 2-week Losing Streak As GDP 'Screams' No Rate Hikes

New York (July 29)  The yellow metal is preparing to end Friday in positive territory, ending a two-week losing streak, with prices trading at their highest level since July 12. December Comex  gold futures last traded at $1,357.60 an ounce  up 2.6% on the week.

At the same time September Comex silver future last traded at $20.350 an ounce, up 4.4% on the week.

The gains come following two major central bank monetary policy decision. Wednesday, gold rallied to session highs despite the Federal Reserve striking an optimistic tone in its monetary policy statement. The committee noted, "Near-term risks to the economic outlook have diminished."

Friday, gold prices hit a two-week high after the Bank of Japan introduced less-than-expected stimulus measures. The central bank announced that it would nearly double its purchases of exchange traded funds to an annual pace of about ¥6 trillion yen from around ¥3.3 trillion yen, increasing its exposure to equity market risks. However, many market participants were expecting much more aggressive action, including the introduction of helicopter money, where the central bank would give money directly to Japanese consumers.

“This was the lowest hanging fruit for the central bank, and there was broad agreement that this step would be taken,” said currency strategist at Brown Brothers Harriman.

Gold’s reaction has been surprising with some analysts saying that traders are jumping into gold because they don’t believe the Fed’s optimism and think it’s only a matter of time before global central banks introduce more stimulus measures.

In this environment, positive sentiment is expected to grow.

“If you needed an excuse to sell gold, you had two this week. When a market can’t fall on bad news then it has to go higher,” said Adam Button, currency strategist at Forexlive.com. “There are just so many reason to like gold that it is difficult to see prices move lower.”

Watch U.S. Dollar Moves…

One of the reasons why gold was able to shake off the Bank of Japan news is because of the sharp rise in the yen against the U.S. dollar.

“As long as the U.S. dollar remains under pressure, buyers will jump into gold,” said Darin Newsom, senior technical analyst at Telvent DTN. “If we see renewed selling pressure in the U.S. dollar, we could see gold reach its recent highs.”

Newsom added that he expects the U.S. dollar to remain weak as there is less incentives for the Federal Reserve to hike rates later in the year.

Helping to shift expectations on rate hikes is second quarter U.S. gross domestic product data, which showed the U.S. economy expanded by just 1.2% between April and June, well below expectations for growth of 2.6%. First-quarter growth was also revised lower to 0.8%, down from its previous reading of 1.1%.

“The GDP report screams ‘no rate hike this year,’” said Button.

Simona Gambarini, commodity economist at Capital Economics, agreed that the GDP data makes it unlikely that the Fed will be able to raise interest rates; however, she added that her firm continues to expect a rate hike in December.

“There is still a chance the Fed could raise rates but it looks more and more unlikely and that will be good for gold,” she said.

Chance of Fed Rate Hike Diminished

Expectations for Federal Reserve interest rate hikes have dropped, fairly sharply following the second quarter GDP numbers. Markets are now pricing in a 12% chance of a rate hike in September, down from 18% Thursday. The probability of a November rate hike also dropped to 12%, down from 19%.

Earlier in the week, markets were pricing in a more than 50% chance of a rate hike in December but now those expectations have fallen to 33%.

It’s the Bank of England’s Turn

Although the market has digested two central bank monetary policy meetings, another one is on the way. Thursday, the Bank of England releases its monetary policy decision, and expectations are high.

The British economy is starting to see the impact of the Brexit vote as consumer confidence has dropped sharply. Economists are expecting the Bank of England to cut interest rates to 0.25% with some calling for new stimulus measures.

Commodity analysts are expecting the BoE’s decision to have an impact on gold because of the overall theme of global easing, which is pushing all sovereign bond yields deeper into negative territory.

Gambarini said following the BoE meeting, she could see both gold and the U.S. dollar rallying as these are both significant safe havens.

“Increasing stimulus measures from other central banks has been a big reason why gold has been able to defy a stronger U.S. dollar,” she said.

What about Nonfarm Payrolls Data?

A lot of focus next week will also be on the July employment report, butanalysts note that gold has more to gain than it has to lose.

Both Gambarini and Button said that Friday’s second quarter GDP report will overshadow the employment report.

“The employment story is as good as it’s going to get but it doesn’t do anything to solve the growth problem,” said Button.

Key Level to Watch

Newsom said that the recent low at $1,318 remains the key support level to watch. He added that if that level holds then gold should push higher and eventually test resistance at $1,384.40.

“Do we break out to new highs? I think that will depend on the U.S. dollar,” he said.

Chris Beauchamp, market analysts at IG, said that renewed momentum in gold should lead to a test of $1,375, the peak closing price seen at the start of the month.

James Chen, analyst at Cityindex, said a break of $1,375 could lead to a rally towards $1,420 an ounce.

Source:  KitcoNews