Why the gold price may not crash when Fed raises rates – The Week UK

After a difficult few days of trading, gold is continuing to drift back from its recent brief rally that was sparked by the Fed’s decision not to raise interest rates.

The precious metal has fallen by around three per cent this year on the back of mounting speculation that interest rates might begin to rise. As rates rise income-generating assets start to look more attractive relative to non-yielding commodities, this should trigger a surge in the dollar, against which gold is often used as a hedge.

With Federal Reserve chairman Janet Yellen and her colleagues at pains to stress that the hold on rates earlier this month was temporary and that a first rise is expected this year, the bounce in gold brought on by the decision not to tighten policy two weeks’ ago has proved to be a shallow one. Having peaked well short of its summer high and then tumbled on Monday, gold fell back slightly again on Tuesday to $1,126 an ounce on the New York Comex exchange.

But there is growing evidence that with the price of gold now approaching its multi-year nadir, demand for physical gold is rising in key markets – and at a time when physical reserves are widely thought to be at record lows.

The Wall Street Journal reports that exports from Hong Kong to mainland China – a proxy for demand for a country that does not publish official gold trading data – reached 1,891.9 tons so far this year, 560.9 tons more than during the same period last year. This signals an early start to buying ahead of the festival season in China and reflects the fact that consumers are “seeking a safe haven” as a result of the slide in stock markets.

Mining.com notes that in India, the second largest gold market in the world after China, bullion imports more than doubled to $4.95bn or 140 tonnes in August, compared to 89 tonnes in July. Central banks in countries like Russia and Kazakhstan are also taking advantage of the low prices to add to their reserves.

It all adds up to a robust picture in terms of demand for physical gold. But analysts warn that “any sharp uptrend in prices is expected only once the Fed’s decision on interest rates is out of the way,” the Wall Street Journal notes. This “will remove the uncertainty on gold’s outlook”.

Heartening news perhaps, but we can’t quite call it a comeback.

Gold price: ‘safe haven’ busted by commodities rout

29 September

Equities are in sharp reverse in yet another knock to investor confidence. And gold, once seen as a safe haven, is no exception to this downward slide. “This is when you know it’s bad,” says Business Insider‘s Myles Udland.

In truth, gold was not expected to rise substantially any time soon, given the widespread belief that a rates rise might be looming. But gold was expected to hold steady in a narrow range while wider markets swung wildly. Instead the precious metal slumped by around $20 on Monday to $1,127 an ounce. 

Part of the reason, Bloomberg notes, is that another rate setter, New York Fed President William C Dudley, is taking the same line as Federal Reserve chairman Janet Yellen. He says that there‘s a strong case for a rates rise before the end of the year. This would hurt non-yielding gold and speculation that a rise may happen has caused the metal to slump by three per cent this year.

But gold is also caught in a broader commodities rout. “Concern about a slowdown in China has hit the mining sector hard, with demand slowing just as years of investment in new production brings a glut of supply on to world markets,” says the Financial Times. All metals are falling ­– copper for example is close to its “lowest levels since the financial crisis” – and mining equities are in free fall.

The outlook for the wider commodities sector is unlikely to change substantially any time soon, with a potential Fed rates rise remaining top of the agenda. While a modest rally cannot be ruled out, this could continue to undermine support for gold for some time to come. 

Gold price range-bound amid Fed obsession

28 September

Gold fell again in Asian trading today, marking the second consecutive negative session in the wake of a hawkish turn from the US central bank.

The precious metal had recorded modest rises through the early part of last week after the decision by the Federal Reserve to hold rates again. Gold is negatively correlated to interest rate moves, which boost the value of income-generating assets relative to non-yielding commodities and also boost the dollar, against which gold is traditionally used as a hedge.

But all that changed after a speech on Thursday evening by the Federal Reserve chairman Janet Yellen in which she sought to pull back on the explicitly dovish tone of the rates call after a torrid few sessions for equities. Yellen stated categorically that a rates rise this year remains the plan. Gold immediately dipped slightly from its one-month high of above $1,150 an ounce.

On Friday, revised data was published showing the US economy grew at a faster-than-thought 3.9 per cent in the second quarter, adding to the case for a hike. In Asian trading today, the first session after the figures were published, gold fell again to $1,142. It is currently in the red again in Europe at $1,138.

Traders generally do not foresee a price collapse over the coming days. With the next Fed call not due until the end of October and most expecting a 2015 rise to come in December, the focus will be on economic data such as the keenly-watched nonfarm payroll report that’s due on Friday. Until then, gold should remain in a fairly narrow range at the lower end of its recent levels.

“Interest around $1,141 should continue to support gold over the short-term, while $1,155 will provide resistance,” MKS Group trader Sam Laughlin told Reuters.

Gold price: another month high, now set to tumble?

25 September

Gold has not quite hit the highs some might have expected in the wake of the surprisingly dovish rates call by the Federal Reserve last week – and even after a brief surge on Thursday some reckon the metal is already primed for another slide.

Reuters reports that gold fell back below $1,150 an ounce in Asian trading overnight, a significant drop from the one-month high of $1,156 it reached on Thursday. That peak came after new consumer sales figures seemed to confirm the more bearish view of the economy set out by Fed rate setters when they voted to hold interest rates at their September meeting.

However, sentiment shifted back after Fed chair Janet Yellen reaffirmed it was still on track to hike rates before the end of this year in a speech yesterday evening. The Financial Times says she outlined a “prudent strategy” of an initial raise this year and gradual tightening thereafter – and warned that holding rates too low for too long “could encourage excessive leverage and other forms of inappropriate risk-taking”.

Gold is negatively correlated to interest rates, as a rise tends to boost returns from income generating assets and thus hits non-yielding commodities.

DailyFX notes that the strong rally on Thursday had set a “higher low” for the precious metal and on one view could see it push on to challenge its summer high of $1,170, but that in general “the ‘big picture’ down trend in gold is still very much intact”. Traders adding to negative price bets could suggest price targets of $1,126 and then below $1,100.

Mining.com adds that there is already evidence of this, citing regulatory filings showing ‘short positions’ – bets on lower prices – are now back within shouting distance of 10 million ounces (283 tonnes), while bullish bets – a gamble on higher prices – have been reduced to five-year lows.

Gold price hit by rates anxiety and stronger dollar

23 September

A stronger dollar and anxiety over interest rates weighed down gold prices yesterday, according to the Wall Street Journal.

Gold for December delivery, the most actively traded contract, ended down 0.7% at $1,124.80 a troy ounce in New York.

Many analysts were already convinced that the commodity’s short-lived rally in response to the Federal Reserve’s decision to hold rates was at an end before yesterday’s development. Now, with several Fed officials signalling that they would still like to raise interest rates later this year, it is hard to disagree.

“Investors don’t want to fight the Fed and they are keeping gold off the radar,” says George Gero, senior vice president at RBC Capital Market Global Futures.

Raised interest rates make gold less attractive compared with interest-bearing securities, but two other factors should also be taken into account. The stronger dollar, a bearish signal for gold which is traded in the US currency, is influencing the slump, while weakness in the Chinese economy has also led to a waning demand for gold.

So what next? Looking ahead, DailyFX says that current momentum signals point to a “further downside” for gold, which has given back half of the gains from the Fed announcement.

The metal has had a volatile summer, swinging between a six-year low of $1,080 an ounce and a high in August of $1,170. Longer-term predictions are almost entirely gloomy.

Gold price: is the post-Fed rally already over?

22 September

Gold is not riding high on the back of the Federal Reserve’s decision to hold interest rates. In fact, after a dip on Monday, some analysts are suggesting a short-lived rally may already be at an end.

Having swung this summer between a six-year low of $1,080 an ounce and a high in August of $1,170, before becoming rooted at around $1,100 ahead of the Fed’s long-awaited decision last week, gold did enjoy an expected bounce after rate setters held fire on Thursday and hit a three week high of $1,142.

But yesterday the precious metal fell back in London trading, notes Bullion Vault, shedding $10 an ounce. The Wall Street Journal reports  that it gained a bit of ground overnight in Asia to settle at $1,134 – and it has since inched up to $1,135 – but it would certainly appear that the commodity is encountering a selling resistance that is preventing the rally from pushing on.

Gold’s Monday decline came as global equities rebounded following their own sharp fall in the previous session – and the subsequent recovery has coincided with risk assets falling back again. With little clarity on when rates might move, and the Fed’s bearish analysis leaving investor confidence brittle, undulation of this nature might persist in the coming days.

The longer-term trend, however, remains negative for gold, says the commodity trading veteran Dan Norcini of the Market Oracle. Despite claims that physical gold stocks are at record lows and are certain to eventually push up prices, Norcini says that if gold fails to break through its current ceiling of around $1,140 and the dollar continues to stabilise, prices will be pressed lower.

“Maybe that will change and the market will finally start a trend higher, but it has an awful lot of work to do on the technical price charts before one can say with any objectivity that the worst is over for gold,” he says.

Why gold prices have failed to take flight

21 September

Gold prices started the week with a modest fall in a muted Asian trading session. The dip reflects the relatively weak bounce that gold has enjoyed since the US Federal Reserve voted to leave interest rates unchanged last week.

The precious metal had been struggling amid speculation that rates might be lifted, a decision that would have hit non-yielding commodities. Prices have now risen from the near multiyear lows that were reached earlier this summer to a three-week high of $1,141 an ounce on Friday, according to the Financial Express. But this remains well short of the summer high of $1,170 with prices dipping back to $1,137 overnight.

According to the Wall Street Journal, the small bounce that came about as a result of the Fed’s decision, combined with an increase in Indian demand for physical gold ahead of the country’s religious festivals, could boost gold to a new “support level” of $1,150. Rains that have hit farm incomes could curtail this somewhat, however, while some analysts see a fundamental case for the rally being “short-lived”.

In a recent Reuters poll, most analysts said they reckoned rates would rise before the end of the year, meaning traders are remaining relatively bearish on commodities and precious metals in particular. The Financial Express notes that hedge funds cut their net long positions on gold – a bet on longer-term price rises – to a five-week low last week.

Inflation, against which gold is traditionally seen as a hedge, is barely registering and the key emerging markets for gold such as China are expected to see a major slowdown in growth over the coming months. This was one feature of the commentary accompanying the Fed decision that has shocked markets and is currently pushing investors out of equities and commodities and into the safe haven of US Treasury bonds.

Gold price lifts on Fed hold – but not much

18 September

Gold prices enjoyed an expected bounce on Thursday as the Federal Reserve decided to hold interest rates, the gains were limited as worries over the global economy and uncertainty over eventual timing of a rates rise undermined the rally.

The precious metal hit an intraday high of $1,133 on the Comex division of the New York Stock Exchange, the Wall Street Journal reports. “Gold would benefit from any delay in raising US interest rates,” the paper explains, as the non-yielding commodity “would struggle to draw investors away from Treasury bonds when rates climb”. 

It adds higher rates “would also boost the dollar, which would make dollar-denominated gold more expensive for buyers”.

So the rise was inevitable, but it was also less than stellar and eventually, notes Reuters, the rally ran out of steam and prices even dipped slightly in Asian trading overnight.

This reflected ongoing uncertainty over when rates will eventually rise after the Fed’s commentary continued to point to a rise this year but offered an extremely bearish view of the global economy and particularly of the effects of a slowdown in China. 

US equities similarly jumped immediately after the announcement and then closed in the red.

Some traders also pointed out that a negative view on major growth economies such as China would hurt gold, as demand in these markets is key to future buying trends. Atul Lele, chief investment officer at Deltec International Group, told the Journal that the Fed commentary “gives us greater confidence in our negative outlook for gold.”

Currently settled at $1,132.70 an ounce, gold remains well below the near-$1,170 high it reached in August. 

It may benefit from a fall in the dollar and equities in the coming days, but if speculation on a rate rise continues to dominate discussion in the coming months, in the lead up to Fed meetings in October and December, prices are likely to come under further negative pressure.

Gold price rallies – and it could move higher

17 September

Gold recorded its biggest one-day rise in around a month on Wednesday, as new inflation data prompted a big bet on the Federal Reserve holding interest rates and held the US dollar in check.

If the decision goes as most investors – and now even a slim majority of economists in most surveys – expect and borrowing costs are not hiked this month, these trends should continue. It will then be a case of how long the rally can last and how high prices can go.

The precious metal rose to $1,119 on the Comex division of the New York Stock exchange, a 1.5 per cent rise that Market Watch notes marks the most significant advance in close to a month to the highest settlement this week.

But gold is still trading below the $1,120 level at which it spent most of last week, and well below a recent high close to $1,170 in August.

“The prospect of a Fed rate hike is still very low, so things are reacting the way you’d expect them to react if there’s no hike,” Dave Meger, director of metals trading at High Ridge Futures in Chicago, told the Wall Street Journal.

He pointed to data published yesterday showing a surprise fall in inflation, which adds to the case against a rise, saying: “We know that inflation is one of the main focal points for the Fed.”

Assuming the Fed does hold, Matt Weller, senior market analyst at Forex.com, told Market Watch gold prices should continue higher in the coming days – but he described the likely increase as “short-term”.

This echoes the sentiment of Linn & Associates broker Ira Epstein, who told the Journal yesterday that a rate rise is still likely either in October or December, which will act as a drag on any rally.

“If the Fed leaves rates unchanged, the upside for gold prices would be limited,” explains India’s Economic Times, “as the move would create more uncertainty over the timing of an eventual rate hike.”

Gold price: heading for six-year low, or support hardening?

16 September

Gold dipped again on Wednesday, marking its 12th decline in the past 15 trading days, as the US dollar continued to advance and equities optimists came to the fore amid apparent ‘Fed fatigue’ ahead of a crucial rates decision this week.

The metal slipped below $1,102 an ounce on the Comex division of the New York Stock Exchange and continues to drift lower and towards support levels that have been holding prices steady in recent weeks. 

This coincided with a two per cent rise in the dollar index, which tracks the greenback against other currencies, the Financial Times reports.

Traders and analysts are confounded by current trends in some areas, the paper adds, as “equities suddenly burst into life at the same time as bond prices fell sharply”, and the dollar rose despite US Treasury bond yields, which it typically tracks, falling. 

“One explanation… is Fed fatigue”: investors have had enough of “the endless debate about a 25 basis point move in rates” that will not change the fact that a rise is inevitable soon, but that a return to normal rates will happen very slowly.

Treasury yields hit a four-year high this week and Tuesday’s fall is considered a technical facet of thinner market trading and a jump in rival German bunds. 

Equities are responding to economic strong fundamentals. Gold is negatively correlated to both – and will in any case most likely fall relative to income-paying assets when interest rates do rise.

All of this means gold will fall further, Ira Epstein, a broker with Linn & Associates in Chicago, told the Wall Street Journal. He said: “Be it September, October or December, the gold market is realizing that the Fed rate increase is coming and that will mean a higher dollar. 

“I think gold is starting to say that the next move is going to challenge the current lows at $1,070, and we might go to $1,050 and then $1,000.” Gold prices haven’t been below $1,000 since October 2009

But James Stanley writes in DailyFX that continued support around $1,100 could be indicative of a “lower high” for the metal that will protect it in the coming weeks, especially if the Fed holds. 

Coupled with uncertainty in China that should add to the allure of gold, a traditional safe haven, this could point to at least a modest recovery, some say.

Gold price rally on Fed hold ‘would be short lived’

15 September

Gold prices are continuing to drift lower – but within a very narrow range – as traders wait on the sidelines ahead of a keenly-watched Federal Reserve rates meeting this week.

The precious metal dipped to below $1,108 in Asia overnight, the Wall Street Journal reports, marginally lower than the finish in the previous session but still lingering around the $1,110 level at which it has found limited support in recent days.

The precious metal is unlikely to “make any significant gains until the meeting, when the possible timing of an increase in US interest rates may become clearer”.

Many economists are still predicting rates will be increased for the first time in nine years at the meeting, at odds with a clear majority of investors betting on fund futures. 

Non-yielding gold would suffer from the combined effect of losing its appeal relative to income-paying assets and from a likely rise in the dollar, against which it is often used as a hedge.

This would imply that the metal may rise, along with other commodities, should the Fed heed the advice of the International Monetary Fund among others and hold fire. 

David Govett at brokers Marex Spectron told Bullion Vault his “personal opinion… is that the Fed will not raise rates and [so] Thursday night should see a rally in precious prices”.

But with a rise in US rates looming even it does not happen this month – most investors still expect a hike before the end of this year – how prolonged will a rally be for gold, which has fallen significantly throughout 2015 in anticipation of fiscal tightening? 

“If the Fed doesn’t raise this month, they will emphasise that the raise is not far off”, Govett adds, so “the rally will probably be short lived”.

Gold price: all eyes on Fed as ‘test’ of lows predicted

14 September

Gold could “re-test” is current low price support level and head towards five-year lows reached earlier this summer, as attention turns to a crucial meeting of US central bank rate setters this week.

The precious metal dipped below the psychologically important threshold of $1,100 an ounce on the New York Comex exchange on Friday, The Bullion Desk says, before recovering to around $1,107. It edged up again in Asia overnight to settle at a $1,109, with traders predicting the near-term trend will depend heavily on the Federal Reserve’s rates decision.

A move to increase rates will put fresh downward pressure on commodities and especially gold, which does not pay an income and so would look increasingly unattractive compared to other assets. The gold price also moves in the opposite direction from that of  the US dollar, which should rise when rates are increased.

If, however, rates are held again, what will happen to gold will be determined by how the Fed reached its decision and whether it signals that the postponement is short-term. A more “dovish” stance, pointing to a later rise, could trigger a rally, though this will itself “depend how equity and currency markets also react to the Fed’s decisions”, HSBC’s James Steel told Reuters.

Overall, traders remain bearish on gold, which as an inflation-hedge is struggling at a time of price stagnation. Hedge funds and other institutional investors have cut their ‘long’ positions to a three-week low and increased their ‘short’ positions, effectively banking on the price falling.

Reuters technical analyst Wang Tao said before the Fed meeting the price would “re-test” the $1,099 level, at which it has found support recently, and there is “a good chance of breaking below this level”. The next support to be found would come in at  $1,089.

Gold closed at a five-and-a-half year low of $1,084 in July.