In a report Wednesday, ahead of the Fed’s monetary policy decision, Ole Hansen, head of commodity strategy at Saxo Bank, said that the imminent rate hike — the seventh in the current cycle — has sapped investor interest and demand from the gold market.
However, he added that with sentiment at such lows, the probably of higher prices has increased. Hansen’s comments come as gold continue to hover around the critical psychological level of $1,300 an ounce.
“The risk of another cat-out-of-the-bag rally has increased — not least considering the dollar rally showing signs of pausing following the recent run-up, US-China trade worries not going away, and rising inflation concerns keeping US real yields range bound,” he said.
Looking at investor interest, Hansen noted that money-manager positions in futures contracts have dropped to nearly a two-year low, while holdings in gold-backed exchange-traded products declined by 34 tonnes in May, dropping from a five-year high.
“These observations are all pointing towards an imminent move in gold and while the downside may still be in play, the low level of hedge-fund participation makes us believe that the direction that could receive most momentum would be to the upside,” he said.
However, gold upside potential ultimately depends on the Federal Reserve, he said. A hawkish hike, he said — where the Fed would signal more aggressive monetary policy action later in the year — would boost the U.S. dollar along with bond yields. Both are negative factors for gold.
On the flip side, a dovish hike — where the Fed signals a commitment to the status quo — would drive gold prices higher on the bank of falling bond yields and a weaker U.S. dollar.
“The key levels to look out for has remained the same for some time now: a sustained break below $1,286/oz would call into question the rally from the December low while a move above $1,308/oz, the 200-day moving average, is likely to attract renewed technical and momentum buying from funds currently underweight in gold,” said Hansen.