King Dollar To Rule Over Gold Price Into Year End - Analysts

New York (Dec 14)  The U.S. dollar remains king of the hill in financial markets heading into the final full trading week of the 2018, which according to some analysts creates a difficult environment for gold prices.

Gold prices are ending the week down compared to the previous week’s five-month high. February gold futures last traded at $1,243.90 an ounce, down 0.69% compared to the previous week.

Looking ahead, some analysts have said that gold could struggle to hold onto current gains as the new year approaches as the U.S. dollar benefits from continued weakness in the euro and Chinese yuan.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he sees gold stuck in the current range, caught in a tug-of-war between weaker equities and strong momentum in the U.S. dollar.

“For gold investors, I think we have to wait and see how this dollar strength plays out in the new year,” he said.

The U.S. dollar is ending the week near a one-year high in part because of renewed weakness in the euro. The euro is a major component in the U.S. dollar index, which last traded at 97.45 points, up 0.77% from last week.

The euro weakness started to build Thursday after European Central Bank President Mario Draghi highlighted growing risks to the European economy. The comments came after the ECB left interest rates unchanged but confirmed that it will stop the monthly asset-purchase program this month.

“The risks surrounding the euro area growth outlook can still be assessed as broadly balanced,” he said in his opening statement. “However, the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.”

Richard Baker, editor of the Eureka Miner Report, said that he could see further U.S. dollar strength dragging down gold prices in the near term. He added that rising real interest rates will also weigh down sentiment in the precious metals market.

“10-year real rates are creeping above 1% even though the 10-year Treasury has fallen below 3%,” he said. “This is because inflation expectations are below 2% on a 10-year basis, cancelling the normally bullish influence of lower interest rates on gold price -- another headwind for higher gold prices in the near term.”

Next Week Is All About The Fed

Although most traders and investors are ready to close the books on what has been a dismal 2018, they will have to wait until at least after Wednesday when the Federal Reserve makes its final monetary policy decision for the year and will set the tone for the start of 2019.

CME’s FedWatch Tool shows that markets have all but priced in a hike next week; however, market participants will be eager to see how many hikes the Fed sees next year. Expectations of further monetary policy tightening have declined sharply in the last few months. Markets now only see the chance of two rate hikes, down from four priced in back in October.

However, it’s still uncertain whether the U.S. central bank will adjust its expectations. In its September projections, also known as the dot-plots, the Federal Reserve saw three interest-rate hikes next year.

“If the Federal Reserve doesn’t shift its expectations lower and closes the gap with market expectations, then it will be difficult for gold to rally next week,” said Hansen. “I think markets really want the Fed to be on the same page.”

However, it’s not clear that the Fed will actually lower its projections as the U.S. economy remains healthy, with the latest retail sales data showed healthy consumption in November.

“I’m not convinced that the Fed will move the dots but that is what the market is expecting,” said Bart Melek, head of commodity strategy at TD Securities. “I think it will take a few meetings before they adjust their forecasts. However, I do think they are going to deliver a more measured tone in the statement.”

Melek added that in the current environment, he sees gold slowly grinding higher but ending the year still below its recent five-month high.

Bill Baruch, president of Blue Line Futures, said that he is expecting the Federal Reserve to adjust its expectations.

“Disappointing global data will be enough to make the Fed pull back,” he said. “I think they will move more in line with market expectations.”

Economists at Nomura also see the Federal Reserve shifting expectations.

“We believe the December meeting will mark a clear shift from the FOMC in terms of the near-term policy rate outlook as the Committee seeks to move away from regular and predictable hikes towards a more ‘contingent” approach,” the analysts said in a recent report. “That being said, there are a number of important limits for how dovish the message will be. We do not believe that they are ready to abandon a tightening bias. Rather, we believe they will signal that they intend to continue hiking rates, just at a slower pace than quarterly intervals.”

Still Plenty Of Value In Gold

Although gold prices are down from their recent five-month highs, Baruch said that he sees the current price as a strong buying opportunity. He added that it’s only a matter of time before prices move higher.

“We have encouraged longs to take profits in gold at $1,250 and we see the current price as a new buying opportunity,” he said. “I look to position more as prices go lower. You can also protect your downside by buying February $1,210 puts.”

Hansen said that he will be watching $1,230 closely in the near term as that represents a critical support level.

“A push below $1,230 would mean that all the new investors that recently bought would be underwater,” he said.

The Final Say

While many market players will probably be turning off their computers after Wednesday’s Fed meeting, there are still a few economic reports investors should pay attention to. Throughout the week, markets will receive important regional manufacturing data. On Tuesday the U.S. Census Bureau will release housing construction data for November.

Finally, Friday markets will receive the final third-quarter gross domestic report, along with manufacturing data for November.

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