Gold Prices Struggling For Gains Ahead Of Fed Meeting

New York (Decx 12)  Gold prices are struggling at the start of what analysts see is an important week for the market.

On Wednesday, the U.S. Federal Reserve will release its interest-rate decision and an updated monetary-policy statement. The focus of the event isn’t the actually rate hike, as markets are pricing in a 100% chance of a 25-basis-point move. According to analysts, what markets are focused on is how aggressive the U.S. central bank is planning to be in 2017.

February gold futures fell overnight to a new 10-month low of $1,152.50 an ounce as bond yields rose. Although prices are well off their lows, gold is struggling to push higher, last trading at $1,163.7 an ounce, relatively flat on the day.

Currently the market is expecting the Fed, in its summery of economic projections (SEP), to signal two rate hikes in 2017. According to some analysts, gold could see a bit of relief rally with this scenario.

“With gold’s recent downtrend, you could argue that the market has priced in this action from the Fed and now we have to wait and see how aggressive they will actually be,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Hansen noted that gold saw its multi-year low last year the day after the Fed meeting. While he does see potential for this type of move again, he added that there is one slight difference.

Last year, bond yields were falling and this year they are rising, with 10-year yields hitting 2.5%, its highest level in almost two years, he explained.

“The gold market is torn between its oversold levels and a stronger U.S. dollar and growing yield gap,” he said. “For now we have to wait and see what the Fed signals for 2017.”

Bart Melek, head of commodity strategy at TD Securities, said that the Fed could take a recent page from the European Central Bank, which last week managed to sound dovish as policymakers reduced the overall monthly purchases by €20 billion.

“It is our belief the Fed will also sound a very dovish tone when hiking rates for the first time since last December,” he said in a recent note to clients.

He added that with a dovish Fed, gold could still benefit as other central banks keep global bond yields in negative territory.

Simona Gambarini, commodities economist at Capital Economics, said in a recent interview with Kitco News that not only is she going to pay attention to the Federal Reserve’s interest-rate projections -- also known as the dot plots – but she is also going to be paying attention to its inflation expectations.

In the last economic projections, the central bank forecast interest rates to be around 1.1% by the end of next year; however, inflation was expected to rise 1.8%, meaning real rates will still be negative.

“It’s real rates that are important and if they are low or negative, then that is good for gold in the long run,” she said.

Maxwell Gold, head of investment strategy at ETF Securities, agreed that the Fed is pursuing a negative real rate policy.

“In an environment where inflationary pressures are expected to rise, real interest rates may likely remain low and negative - a tailwind for metals,” he said.

Source: KitcoNews