Gold Price Shows Signs Of Stabilizing; Expected Fed Rate Hike Already Factored Into Prices
San Francisco (Nov 19) The gold market has pretty much factored in tightening by the Federal Reserve next month, meaning much of the bearish news is now “baked in the cake” and prices can start to stabilize in the short term, or at least the pace of the decline will slow, analysts and strategists say.
Meanwhile, one of the next focuses for traders will be trying to gauge how aggressively the Fed may tighten, some analysts noted. One plus for gold, they pointed out, is that policy-makers seem to be making efforts to let markets know that any tightening is likely to be gradual.
Comex nearby gold futures hit a low of $1,062 an ounce this week, the weakest level since February 2010, and down11% from the Oct. 15 high of $1,191.70. The pressure seen in gold has been blamed on U.S. dollar strength and expectations for the Fed to hike rates by 25 basis points in December, particularly after the government reported a 271,000 rise in October nonfarm payrolls.
The Federal Reserve released minutes of the October policy-making meeting on Wednesday, and most economists construed it as pointing toward a December rate hike. But, whereas worries about higher rates have hurt gold in the past, the metal nevertheless has since moved higher. As of 12:28 p.m. EST Thursday, Comex December gold was up $12.70, or 1.2%, to $1,081.40 an ounce.
“The gold market has factored in a December tightening of a quarter point,” said George Gero, precious-metals strategist with RBC Capital Markets Global Futures.
If it happens, this would be the first tightening since 2006. Traders then will be watching data and Fed comments “to see if it’s ‘one and done’ or whether there will be a gradual increase,” Gero continued.
Bart Melek, head of commodity strategy with TD Securities, echoed the view that a tightening is coming next month and that trader then will be assessing just how aggressive policy-makers will be on any future moves.
“I think there is very little ambiguity now whether they’re pulling the trigger or not on Dec. 16. I think the market is OK with it. We kind of got over the initial shock,” Melek said, pointing out that equities closed higher on Wednesday even after the FOMC minutes.
Observers were mixed on what to expect from gold in the short to medium term.
Gero cited potential for a bounce as jewelers start to step in and buy at lower prices ahead of the holidays. Improved physical demand is also reflected by a narrowing of the spread between the December and February Comex futures contracts, he added. Normally, the deferred months trade at a premium to reflect storage costs of any commodity; however; February gold’s premium over December was just 20 cents.
Jim Comiskey, senior market strategist with International Futures Group, also said he expects a bounce. He described gold prices as “ridiculously low” based on a nine-day reading of the Relative Strength Index. As of Wednesday’s settlement, the RSI stood at 17.33, he said. Readings below 20 are generally considered oversold, while those above 80 are overbought.
“The Fed has made it clear they’re going to raise interest rates 25 basis points,” he said. “In the grand scheme of things, what is 25 basis points? Are you kidding me? After seven years of zero interest rates?”
He suggested December gold could claw its way back to the $1,100 to $1,105 area in a short time. He also pointed out that Commodity Futures Trading Commission data show a large number of short, or bearish, bets among speculators. This means potential for buying in the form of short covering as they exit these positions, especially if they start “feeling some heat,” Comiskey said.
Comiskey noted that gold production generally seems to be holding up, citing fresh news that South African producer Gold Fields Ltd. reported a 42% increase in output at its South Deep mine. As a result, the market does not appear to be getting huge output cuts that would be supportive for any commodity.
“I think all the bearish news is (already) baked in the cake for the metals,” Comiskey said.
Others see potential for the precious metal to slip some more, although not as dramatically as over the past month.
“I don’t think the worst is behind us because we haven’t started the tightening,” Melek said. “I think we can still drift lower, but not a massive rout.”
Bill O’Neill, one of the principals with LOGIC Advisors, pointed out that the Fed minutes make it clear that any future rate hikes are going to be “extremely gradual” rather than aggressive.
“That has given a little bit of relief to the gold market, which was really getting oversold,” he said. The market also might be drawing some slight support from worries about terrorism after the attacks in Paris last weekend, he said.
Still, O’Neill looks for gold to remain on the defensive and perhaps test the $1,050 area. However, after the weakness that has already occurred, “from a risk/reward perspective, being an aggressive seller of gold here is not a good risk at this point,” O’Neill said. “We need to let the market breathe a little bit and see where we go.”
A key, he added, may be whether there is an end to the recent liquidation of holdings in gold exchange-traded funds.