Gold To Remain Volatile Ahead Of Key Fed Meeting Next Week – Analysts

New York (Sept 12)  Although there is a full slate of U.S. economic data to be released next week, analysts say the markets only care about one thing: the Federal Open Market Committee (FOMC) meeting.

“Brace for impact because no matter what happens next week, markets are going to be volatile,” said Phil Streible, senior market strategist at RJO Futures. 

Currently the Fed Funds futures contract, a proxy for market expectations of the Fed Fund rate, is pricing less than a 30% chance that the central bank raises interest rates on Thursday; however, economists and commodity analysts say the chances are closer to 50/50. Some analysts noted that gold is suffering, ending its third consecutive week in negative territory, but traders refuse to price out the possibility of a rate hike.

Comex December gold futures, ended Friday’s session at $1,103.30 an ounce, down more than 1.7% by the end of what was a shortened trading week due to the Labor Day holiday in Canada and the U.S.
 
For the second week in a row silver managed to end the week in relatively neutral territory, outperforming the yellow metal. Comex December silver futures settled Friday at $14.505 an ounce, down less than 0.5% on the week.

With so much uncertainty surrounding the Fed’s monetary policy decision next week, the near-term outlook for gold can, at best, be described as mixed. This week, 195 people voted in the online gold survey. Among the participants, 74 people, or 38%, were bullish on gold next week; 81 voters, or 45%, were bearish on the yellow metal; and 34 people, or 17%, neutral. Last week, 44% of respondents were bullish on gold prices.

Market professionals are slightly at odds with the retail side, with more analysts expecting to see higher prices next week. Out of 35 market experts contacted, 20 responded, of which nine or 45%, said they expect to see higher prices next week. At the same time, seven professionals, or 35%, said they see lower prices, and four people, or 20%, were neutral on gold. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

Although analysts are slightly more bullish heading into next week, their enthusiasm appears to be tempered. Most analysts are optimistic on gold prices and think that the yellow metal could bounce higher if the Fed delays its rate hike; however gains could be limited as expectations will only be pushed back until December.

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, said that it is difficult for investors to shake off the negative sentiment overhanging the marketplace.

“I think you have to go with the current sentiment and that is for prices to go lower,” he said.

Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the In Gold We Trust report, agreed that, in the near-term, gold will suffer as it lacks a catalyst to drive prices higher.

Stoeferle, added that he doesn’t think there will be a rate hike in September, nor for the rest of 2015; but that factor won’t be enough to turn around the current down trend.

“There are too many deflationary pressures in the global economy and the market has lost confidence in gold,” he said.

Stoeferle said that he could see gold retesting support at $1,080 an ounce in the near-term

Sean Lusk, director of commercial hedging at Walsh Trading, said he is advising traders to look beyond gold’s initial reaction and volatility follow the rate hike. He explained that he is expecting to see some counter-intuitive moves in the gold as a result of the rate hike.

In his first scenario, he said if the Fed hikes rates at first it will be U.S. dollar positive and gold negative, but the tightening could create a selloff in equity markets and capital could start moving into gold.

In his second scenario, he said that if the Fed delays its hike it will be U.S. dollar negative and gold positive in the initial reaction. However, the loose monetary policy will support equity markets and capital will flow out of gold and back into stocks.

“If the Fed does hike rates gold could selloff but I think it would be the buy of a lifetime,” he said.

Streible, said that by using a defensive options straddle strategy, traders can not only protect themselves but also take advantage of the volatility. He explained that one basic strategy would be to buy a 60-day or 90-day 1,080 put gold option and a $1,120 call option.

He explained that if the Fed raises rates on Sept. 17 then he would expect gold to fall below support at $1,080. Traders can then lock in profits from that put. He added that after the drop, he would expect to see some strong buying momentum and that could drive gold prices back up to $1,150 or even the last high at $1,170, potentially making the call options profitable.

In the reverse scenario, if the Fed doesn’t hike rates then gold could push up to $1,150 in initial reaction, which put the call option “in the money”; however, after the initial reaction selling pressure should step in driving gold back lower keeping the put option in play.

“Right now there are a lot of uncertainties so traders should be looking at taking defensive measures,” he said.

While all eyes will be on the Fed, traders shouldn’t forget about the slate of economic data to be released next week including U.S. August retail sales, regional manufacturing data, the consumer price index for August, and housing market data.

Source: KitcoNews