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Gold Price Consolidates – Will FOMC Deliver a Break?

Gold Price Consolidates – Will FOMC Deliver a Break?

2016-04-23 00:23:00
Jeremy Wagner, CEWA-M, Senior Strategist
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Gold Price Consolidates – Will FOMC Deliver a Break?Gold Price Consolidates – Will FOMC Deliver a Break?

Fundamental Forecast for Gold: Bearish

  • Gold prices continue a 2 month period of consolidation
  • Wednesday’s FOMC rate announcement could catalyze a break out
  • Watch retail trading sentiment through the announcement for directional clues

Gold prices continue to consolidate the gains from the beginning of the year as the yellow metal has traded sideways for 10 weeks. Gold is currently caught in a battleground of a low rate environment and rising risk assets with the US Dollar being the arbitrator.

First, nominal US 10 Year Treasury yields have traded sideways between 1.64% and 1.98% since February 11. Likewise, inflation in the US has steadily moved up near 1% YoY. This provides a backdrop for a low real interest rate environment which tends to favor higher gold prices.

The challenge with the current low interest rate environment is that we’re seeing rising risk assets, such as equities. Fed speculation on pushing out rate hikes has been the fuel for the rising risk assets. If other interest bearing or dividend paying instruments are strong, then Gold, which doesn’t pay any interest, may be left out in the cold. So we turn our attention to the Fed’s next move.

This week, the FOMC is set to meet on April 26-27. Fed fund futures suggest the next hike may came in the latter part of 2016. With US elections being held around that same time, we will likely see a void in movement by the Fed in 4Q 2016. Therefore, look for a rate hike to be pushed forward a couple of months, or pushed back into 2017.

As a result, the next move in Gold may predicate on how USDOLLAR behaves. If we see broad based weakening in the Buck on the back of a dampened Fed rate path outlook, then Gold may see a break higher out of the consolidation. On the other hand, if Yellen can beat the drum and point to a pre-US election rate hike, then USD may strengthen dragging Gold prices lower.

Gold Price Consolidates – Will FOMC Deliver a Break?

Retail sentiment towards Gold as measured through FXCM’s Speculative Sentiment Index (SSI) is stuck in neutral. SSI has ranged from -1.6 to +1.2 over the past few weeks. This is indicative of a range environment.

Friday’s break below $1244 opens the door for a range floor retest of $1191-$1206. We will want to keep an eye on SSI if price enters the range floor. Likewise, follow SSI for clues on the near term direction during Wednesday’s FOMC announcement. A falling SSI may indicate a bullish undertone while an increasing SSI may indicate a bearish undertone.

Follow SSI in real time here.

Interested in a longer term outlook for Gold, Equities, or USD? Download our 2Q 2016 forecast here.

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