Gold prices continue to benefit from shifting rate expectations

New York (Jun 13)  Recent comments from Fed Chair Janet Yellen that kept interest rate hikes on the table this year wasn’t enough to dent gold’s momentum as prices prepare to end its second week of strong gains.

Gold prices continued to benefit from shifting rate expectations. A trend that started after the massively disappointing U.S. May employment report that showed only 38,000 jobs were created last month.

August Comex gold futures last traded at $1,275.50 an ounce, up 2.4% for the week. However, silver’s gains has been even more impressive as prices have jumped above $17 an ounce. July Comex silver futures last traded at $17.335 an ounce up 5.6% on the week.

Is $1,300 in the cards next week?

“There is a lot of nervousness in the market and it doesn’t matter what the Fed does next week that is going to change that,” said Ole Hansen, head of commodity strategy at Saxo Bank. “If gold closes above $1,265 and silver closes above $17.19 then we have a clear run to the highs seen earlier in the year.”

“Gold prices appear poised to test May swing highs after breaking trend line resistance capping gains over the past month. A break above the 1297.14-1303.62 area marked by the 38.2% Fibonacci expansion and the May 2 high exposes the 50% level at 1327.29,” said analysts at DailyFX.

Overshadowing the Fed

While U.S. interest rate expectations have created volatility in futures markets. Expanding global negative interest rates has made gold an attractive investment across the board. According to some analysts, this factor will continue to bode well for gold, driving prices higher.

Hansen explained that the global bond market is the elephant in the room. U.S. bond yields are flattening because of strong demand from European and Japanese investors who are faced with negative yields in their own countries, he said.

However, Jonathan Butler, an analyst at Mitsubishi, said he is also bullish on gold because of negative global interest rates but added there are risks of a knee-jerk reaction after the Federal Reserve meeting.

“As long as accommodative monetary policy remains the stated aim of major central banks, sovereign yields are likely to remain low – although we note that there is possible downside risk to gold in the short term if any of the comments from the Fed next week are interpreted as being somewhat hawkish or implying a July rate hike could still be on the cards,” he said.

Brexit Looms On The Horizon

Also casting a shadow on the Fed interest rate decision is the UK referendum on whether or not to leave the European Union. The referendum will be held June 23 but these past weeks saw the “leave” camp take the lead in national polls.

Analysts expect that gold prices will continue to push higher as uncertainty leading up to the vote continues to grow. Australian Bank ANZ is probably the most bullish on gold in the event of a Brexit.

“If the Leave campaign is successful, the expected collapse in the GBP and resultant market volatility would likely see investors seek safe-haven assets,” the analysts said in a report published Friday. “This could provide a massive boost to investor demand and would likely push gold towards USD1,400/oz.”

Need To Know On Fed Day

Although global bond demand is reducing the Fed’s impact on the short-end of the bond curve, Federal Open Market Committee monetary policy decision Wednesday will play an important role for future interest rate expectations.

The following are key elements to the monetary policy meeting:

1.Economic and Interest Rate Projections: Next week’s meeting is important because aside from its monetary policy statement, the Fed will also publish its updated economic projections along with the infamous “dot plots.” Economists and analyst have regularly dismissed the Fed’s interest expectations as they have been terrible predictors of the actual trajectory. For example, in December, committee members forecasted the potential for four rate hikes in 2016. The projections were reduced to two in March’s updated forecasts.

However, analysts noted that if the dot plots haven’t significantly shifted then that could signal continued support for two rate hikes this year, reopening the door to a possible hike in July.

1.Yellen’s Press Conference: Once the statement and projections are released Fed Chair Janet Yellen will step in front of the cameras and give her take on the latest monetary policy decision. Monday, Yellen remained optimistic in her speech, saying that she believes the U.s. economy is still growing and can support a gradual rise in interest rates “over-time.” Although she supported the idea of interest rate hikes, she did not provide any timeframe for them.

What are markets saying?

CME 30-day Fed Fund Futures are pricing in a “slim-to-no” chance of a rate hike next week. Market expectations for a move are hovering at 1.9%. Chances of a July move are also falling; markets are pricing in a 22.5% chance of higher interest rates. Last week, before the May employment report, there was a 50/50 chance of a move in July.

Source: ScrapMonster