Many analysts have said the gold market, which has dropped almost 12% from April, has fully priced in the Federal Reserve’s current monetary policy trajectory and is now primed to see a relief rally.
“The market is coiling well and we just need a catalyst to spark a rally and that could come from the Fed,” said Bill Baruch, president of Blue Line Futures.
According to some commodity analysts, the Federal Reserve’s view on where it sees neutral interest rates will be crucial to gold’s next trend.
What Is The Neutral Rate?
In basic terms, the neutral or natural rate is where equilibrium is found in the economy where monetary policy is neither stimulative nor restrictive. The Federal Reserve itself sees interest rates approaching that neutral territory, according to discussions at the previous monetary policy meeting.
“Participants noted that the federal funds rate was moving closer to the range of estimates of its neutral level,” said the Minutes of the July monetary policy meeting.
However, economists and analysts want to see if that sentiment has changed as inflation continues to heat up and the U.S. labor market remains at full employment.
“The fed has no reason to be more hawkish than it already is,” said Baruch. “I think Powell will want to keep an even keel as there is growing uncertainty in the U.S. economy. We’ve had a strong summer of economic growth, but this pace isn’t sustainable.”
Jasper Lawler, head of Research at the London Capital Group, said that gold prices have been dragged down because of surging momentum in the U.S. dollar as markets have been pricing in aggressive monetary policy action from the U.S. central bank. However, he added that that particular trade is running out of steam and could potentially reverse next week.
“After the strong rally we have seen in the U.S. dollar the market needs something more than Fed’s current steady path for interest rates,” he said. “From a risk/reward standpoint, the gold market looks good at these levels.”
The U.S. dollar has struggled to find momentum in this past week as prices fell to a 3-month low. The U.S. dollar index last traded at 94.26, down almost 1% from the previos week.
George Gero, managing director at RBC Wealth Management, said rising bond yields highlights a growing risk that the central bank shifts its neutral outlook. 10-year bond yields are trading at 3.07%, its highest level since mid-May.
So far this month 10-year bond yields have risen nearly 8%.
Reference: Kitco
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