The much anticipated Fed FOMC policy meeting on September 16-17 had analysts waiting with bated breath. It has been noted that a Fed rate hike would spur demand for US dollars, which ultimately drives indices lower, owing to weaker exports, increased company expenses and a shift towards fixed interest-bearing securities. However, analysts are carefully watching the gold price which has been moving lower in anticipation of the Fed meeting. While the decline in the gold price has been narrow and many have deemed the price movement horizontal ‘sideways’, there is a clear downward trend in the gold price. The price of gold on the Comex was last quoted at $1,105 per ounce (September 15, 2015). This marks a 2-day downward trend which is likely to continue for the rest of the week. The price of gold in Tokyo, Euro Spot, Indian Rupee Spot, Japanese Yen Spot and British Pound Spot are all lower.
That the price of gold has been hovering around the $1,110 per ounce level and this is somewhat encouraging to those who feel that is a support level for gold. Since gold does not offer interest returns, any increase in the Fed rate would hit the precious metal particularly hard. That much is evident with traders in the run-up to the Fed policy meeting. The likelihood of a September rate hike fluctuates between 27% and 40%, depending on who is being quizzed. Economists are more evenly split, with a 50-50 outlook. The reasons why gold would suffer are twofold: For starters gold is a dollar-denominated asset and any rise in the value of the dollar relative to other currencies would make gold relatively more expensive. This would ultimately decrease the demand for gold. The second reason relates to gold being substituted for Treasury bonds and fixed interest-bearing accounts.
Fiscal Tightening will Hurt Gold
There’s also something else that may occur with the Fed policy meeting in September. If it turns out that a rate hike does not take place, gold may in fact rally along with other commodities. It will retain its lustre since there will be little incentive for investors to switch over to fixed interest-bearing accounts. However a caveat is in order: The likelihood of a rate hike does not diminish if the Fed decision goes against a rate hike. Economic analysts will be carefully watching the vote tally to see how many hawks vote in favour of a rate hike, and how many doves vote against it. This will give a clear indication as to the likely movement in the next Fed policy meeting if nothing transpires from the September meeting. The fact of the matter is that the majority of investors are anticipating a rate increase before the end of 2015. The absence of a September increase will probably allow gold to rally towards the end of the year, but that may prove short lived. Fiscal tightening always has a negative impact on the gold price.
Gold Moves in an Opposite Direction to the USD
It is entirely within the realm of possibility that gold will test its support levels which are at multi-year lows. On Friday, 11 September, gold dropped beneath the important psychological barrier at $1,100 per ounce. This got many options traders, even those who utilise the most advanced options trading strategies to take notice. While the gold price rebounded on Friday, it is still precariously balanced beneath the key $1,110 per ounce level. The current price of gold is a clear indication of the uncertainty that is pervading the commodities markets. High volatility characterises equities, indices, commodities and stocks at present, given the equities collapse in China and the domino effect that has impacted global markets. It should be remembered that the price of gold moves in an opposite direction to that of the US dollar. When the USD strengthens, the price of gold declines, and when the USD weakens, the demand for gold increases.
The short-term prognosis for gold is decidedly negative. There are more put options being placed on the precious metal than at any point in the year, owing to China weakness, dollar strength, and the volatility created by Fed interest-rate discussions. Should the doves win out, we can expect gold to gain some ground – but that will prove short lived as mentioned earlier. Gold is traditionally viewed as a safe haven asset that traders flock to when equity markets start subsiding. Governments, investors and traders go long on gold and short on equities, or take the opposite approach when necessary. In July 2015, the price of gold dipped to a 5.5 year low when it was trading at $1,084 per ounce. Since gold is largely impacted by speculators’ opinions, market sentiment is hugely important in determining the price of gold. We may not have seen the bottom for gold in 2015 just yet, because any future rate hikes have the capacity to drive the price even lower. A strengthening USD, weakening emerging market currencies and downward revisions to China’s GDP for 2015 are adding pressure onto the price of gold.
The Final Word
Any positive news emanating from US economic data reports also drives the price of gold down. That’s why everybody knows that gold does well when everything else is heading south!
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