Price of Gold Fundamental Daily Forecast – Surprise Dovish Fed Could Trigger Short-covering Rally

Gold rebounded from a two-week low to post a modest gain on Tuesday in reaction to a weaker U.S. Dollar. Volume was light as investors prepared for the Fed’s monetary policy announcements on Wednesday.

December Comex Gold futures settled at $1314.60, up $3.80 or +0.29%.

Forecast

Gold traders are going to continue to respond to the movement in U.S. Treasury yields and the U.S. stock indexes. Treasury yields are likely to rise if the Fed is hawkish. This should make the U.S. Dollar a more attractive investment while weakening foreign demand for dollar-denominated gold.

Stocks are a tough call because investors don’t like rising interest rates, however, if the Fed is dovish, stocks should soar which would hurt demand for lower-risk assets like gold.

Based on the recent price action, i.e. rising Treasury yields and falling gold prices, it is possible that traders have already built in a hawkish message from the Fed. If this is the case then gold may find support and we could see a short-covering rally. This will only be a short-term response however.

On Wednesday at 1800 GMT, the FOMC is expected to deliver its decision on interest rates, issue its monetary policy statement and release its economic projections.

Fed policymakers are expected to hold the benchmark interest rate unchanged at<1.25 percent and announce their plan to begin reducing the central bank’s $4.5 billion balance sheet.

The Fed is expected to announce a lowering of monthly bond purchases, starting in October. The Fed is also expected to leave the door open for a rate increase at their December 12-13 meeting. At the close on Tuesday, the futures markets implied traders saw a 58.3 percent chance of a rate increase at year-end, according to the CME FedWatch tool.

The biggest risk for the U.S. Dollar is if the Fed casts doubt on a December rate hike. However, this news will be bullish for gold.

Stripping out concerns over geopolitical events, a hawkish Fed will be bearish for gold and a dovish Fed bullish. The actual price action, however, will be determined by how much of the news has actually been built into the market. Since the recent price action suggests traders have built in a hawkish message from the Fed, a surprise dovish message could send prices surging to the upside. Gains could be limited, however, if stock prices also rally sharply higher.

Hedge and commodity funds are still long so they are likely to add to positions if the Fed is bullish. If the Fed is bearish then long liquidation could begin.