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Gold Investors Should Keep An Eye On Fed Policy

Economic uncertainty fueled by growing trade tensions between China and the U.S. is creating some momentum in the gold market; looking ahead one research firm said the metal’s next rally could come from the Federal Reserve’s shifting monetary policy.

In a second-quarter gold forecast report, market analysts David Song and Michael Boutros at DailyFx said that they expect to see higher prices through the second quarter as the Federal Reserve adjusts its forward guidance.

“The price for bullion may ultimately trade to fresh yearly highs as the central bank plans to wind down the $50B/month in quantitative tightening (Q.T.) starting in May,” the analysts said.

Not only is the central bank stopping the unwind of its balance sheet but the analysts said that they expect the committee at the June monetary policy meeting to lay the groundwork for “lower-for-longer” monetary policy, another bullish factor for the yellow metal.

“Keep in mind, the Federal Open Market Committee (FOMC) advocates a ‘patient’ approach amid the mixed data prints coming out of the U.S. economy, but the central bank may have a difficult time in defending the wait-and-see approach for monetary policy as the inversion in the U.S. treasury yield curve warns of a looming recession,” the analysts said.

The analysts’ comments reflect a market that sees the growing possibility of a rate cut by the end of the year. The CME FedWatch Tool shows that markets are pricing in a 70% chance that the Federal Reserve will cut rates by December, a significant increase from last week where markets saw a roughly 50/50 chance.

“The current environment may continue to heighten the appeal of gold amid the upcoming changes in Fed policy. The price for bullion may exhibit a more bullish behavior over the coming months as the FOMC abandons hawkish forward guidance for monetary policy,” the analysts at DailyFX said.

Looking at gold’s technical price action, the analysts said that although there is initial resistance at $1,327 an ounce, they are watching the February highs at $1,350 closely. They added that any pullback to $1,275 or $1,263 an ounce should be seen as a buying opportunity.

Although the market is off Monday’s one-month highs, gold prices are holding on to most of its recent gains. June gold futures last traded at $1,296 an ounce, down 0.45% on the day.