Next Week Could Be A Volatile Week For Gold

New York (Mar 13)  Summary:  •Four of the world’s major central banks are announcing interest rate decisions next week. •Each central bank could potentially surprise the market with their decisions.

•We feel there is a strong chance of substantial movement in the gold price in both directions depending on their actions.

•We feel it would be prudent for most investors to step back from gold this week because of the downside risk.

What a huge week of economic data we are going to have to digest next week. With no less than four of the world's major central banks announcing interest rate decisions, it could be an incredibly volatile week on the markets. Because of this we really aren't sure whether gold will finish the week below $1,200 or have a nice run up to $1,300. The same applies for the most popular gold ETF, which we hold, the SPDR Gold Trust ETF (NYSEARCA:GLD).

The week has already started, or finished depending on your view, with a splutter. Chinese Industrial Production for January and February came in lower than expected at +5.4 percent on last year. The market had been expecting a reading of +5.6 percent, so a miss here further fuels worries of a slowdown in China. We like the January and February combined figure because it smooths out the Lunar New Year anomalies, allowing for a more accurate picture.

Next on the calendar is the Bank of Japan's interest rate decision on Tuesday, March 15. This for us is a particularly awkward one for gold traders. Further interest rate cuts were originally ruled out by many with stimulus being the preferred action, whereas now they seem to be have reversed. A survey by Bloomberg yesterday found 80 percent of analysts surveyed thought a further cut to the negative interest rate was the most likely action to be taken by Governor Kuroda. Taking things a step further, 90 percent of those surveyed also felt more easing would come in one of the following four meetings. The survey also revealed that just five out of the 40 economists surveyed believed additional stimulus would be unleashed this week.

Now, the difficult thing with this and gold are the possible different reactions to Governor Kuroda's potential moves. We feel that if rates are cut further, the volatility it could bring with it could cause gold to rally higher. But, if Governor Kuroda were to go down the path of further stimulus, it could cause a rally in global stock markets which could see investors move from safety to riskier asset classes. This could cause a decline in the gold price.

Moving to Wednesday, March 16 and we see Janet Yellen take centre stage. Few expect the Fed to lift rates, but the positive economic data that has come out of the United States gives it the slightest chance of surprise. We think it is incredibly unlikely for the Fed to make a move, but few central banks have done as the market has expected this year.

To confuse things further, there have been calls from some in the market for rate rises in March. The basis for this argument is that the Fed would be missing a great opportunity to finally raise rates again. They believe the volatility markets experience from mid-2015 through to last month has now past. This, as well as strong employment numbers and higher oil prices, according to some is the best chance they have had yet to do it. We don't think it will happen, but we're not against it happening. We have always favoured rate rises being done at the first opportunity, in order to leave ZIRP well and truly behind. If there were a lift in rates we are unsure how the market will react. Generally, we believe if the market agrees with the decision, the markets will rally, but if they don't, it could be quite a chaotic day. Again, gold will most probably be affected.

On Thursday we're then skipping across the Atlantic to the United Kingdom and Switzerland which are both due to announce their respective interest rate decisions. Once again, few know what to expect from the Bank of England's rates decision. Most probably things will remain the same, but there has been talk of both interest rate rises and cuts. One thing for sure, though, is that the Bank of England's Governor Mark Carney is very much against negative interest rates. So we feel it would be highly unlikely, if not impossible, for them to occur on his watch. But much like the other decisions, nobody quite knows what is going to happen and global markets will no doubt be on edge. In Switzerland, nobody is expecting any changes to its current negative interest rate policy, so this one should be business as usual. But anything contrary to this could cause a bit of volatility.

We are going to remain holding gold through next week, but only because it is a relatively small part of our portfolio. If it were a larger holding, we would probably take profit now because we feel this time next week the gold price could have moved substantially. But the direction will depend on the actions of the central banks mentioned above. As nobody really knows what action they will take, we feel it is a dangerous time to hold gold.

Source: MacroInvesting