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Gold Future Price Is Cheaper than Spot as Fed Firms up on Rate Hike

Gold Future Price Is Cheaper than Spot as Fed Firms up on Rate Hike

Nathalie Huynh,

Talking Points:

  • Expectation of short-term gold price falls below spot as Fed’s hike becomes imminent
  • Oil stays in range with added pressure from Cushing stock build
  • Copper spirals to new 6-year low in line with faltering demand and strong USD

Gold made a small comeback in Asian session after hitting a 5-year low at 1064.55 yesterday. As market expectation firms up on a first rate rise at the Federal Reserve’s December meeting, value of gold as a non-yielding asset has fallen. The October Fed minutes revealed that most participants anticipated that prerequisites to justify a rate increase would be met before the next meeting.

Since this Monday, forecasted prices of gold (forward pricing) have gone below spot price for the first time in a month. As of today, prices of period up to 3 months ahead (until March 23) are less than spot price. This indicates market’s expectation for lower prices, simultaneous to the timing of a first Fed rate hike.

Gold Future Price Is Cheaper than Spot as Fed Firms up on Rate Hike

Excel chart. Source: spot and composite forward prices, quoted by Bloomberg

Oil quickly returned to its recent range above $40 after a dip to $39.91 following mixed crude stock data from U.S. Department of Energy. While total crude stocks undershot forecast and prior month’s figure, stock at Cushing piled up twice the anticipated amount. The reversal at Cushing hub from a draw to a stockpile in the last two weeks was taken as an alternative sign of a persistent glut.

Copper made a new 6-year low at 2.0650 on COMEX just before Asia noon under two sticky causals: a stronger USD ahead of the first Fed rate hike, and faltering demand from China. Zinc also slid to the lowest since 2009. In China, copper is used in construction industry and also as collateral for cross-border financing (to counter the country’s capital restriction). Both channels have shown signs of exhaustion, even as world supply becomes constrained.

GOLD TECHNICAL ANALYSIS – Gold finally picked up above its 5-year low range. Expectation for a December rate hike is now fully priced in to market prices thus reduces knee-jerk reactions. If gold price sustains above 1074.25 throughout today, a new range and consolidation could emerge.

Gold Future Price Is Cheaper than Spot as Fed Firms up on Rate Hike

15-minute chart - Created Using FXCM Marketscope

COPPER TECHNICAL ANALYSIS – Copper is testing a new 6-year low as we write, again with no concrete support level on the downside other than the 2.0600 big figure. It has been a perpetual decline so far with persistent daily momentum at the lower bound of range. The bears should still be cautious of any rebound up to 2.2025 resistance level.

Gold Future Price Is Cheaper than Spot as Fed Firms up on Rate Hike

DailyChart - Created Using FXCM Marketscope

CRUDE OIL TECHNICAL ANALYSIS WTI oil stayed range-bound for a fifth day, despite a brief dip below $40 due to report of US inventory increase. Prices have been overstretched on the downside, which may have led to the current consolidation. This remains a bearish market for oil overall.

Gold Future Price Is Cheaper than Spot as Fed Firms up on Rate Hike

15-minute Chart - Created Using FXCM Marketscope

--- Written by Nathalie Huynh, Currency Strategist for DailyFX.com

Contact and follow Nathalie on Twitter: @nathuynh

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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