The much-awaited U.S. midterm elections have come and gone, and taken with them President Donald Trump’s hold on Congress after Democrats took back the House. On Thursday, the Federal Reserve will meet and issue its monthly policy statement. Speculators across markets, including gold, think the central bank will raise rates again in December. Or will it?
Since its third hike for the year in September, expectations have been high that the Fed will press ahead with another increase next month before closing out 2018. Runaway economic growth has prompted the Fed to stay well ahead of the curve with rates that will prevent overheating, with all markets reacting to this as they were supposed to, except for one: gold.
In the last month, equities tanked but bond yields surged and the dollar rallied. Gold, mainly a contrarian trade to the dollar, has stayed above the $1,200 per troy ounce level—critical to the psyche of market bulls—since August, helped partly by its safe haven role amid the US-China trade war and other troubles.
Recent Performance: Remarkable Or Lamentable?
Some view gold’s performance of the past three months as remarkable.
Others think it’s lamentable, given that the precious metal traded above $1,365 in April, with current futures about 11 percent lower from those peaks. They also think the metal is trapped with nowhere to go.
With the gridlock expected in Washington after Tuesday’s midterm vote, talk is building that Trump's pro-growth policies may stall and the Fed could be forced to hit the brakes on its unrelenting rate hikes. The question then is: will gold continue getting a lifeline at $1,200?
Fawad Razaqzada, a researcher with forex.com, thinks the yellow metal just might, if equity markets weaken along with the dollar, to provide that support.
Inflationary Pressures Could Cool
In a note issued on Wednesday, Razaqzada said:
“Although the Federal Reserve will most likely still go on to hike interest rates for the fourth time this year in December, the reaction of the markets suggests that investors are perhaps expecting future inflationary pressures to just ease slightly under a divided government.”
He adds:
“Trump’s plans to further cut taxes and raise government spending may be difficult to pass now. This may mean slightly less aggressive Federal Reserve rate hikes in the future than would have been the case had the Republicans retained control of both houses.”
As for equity markets, speculation for now points to the fact that it would be extremely difficult for Democrats to retake control of the Senate in 2020, leaving Republicans in charge of existing business-friendly policies.
Yet stocks could come under pressure, Razaqzada says, if Democrats in control of the lower chamber open Congressional investigations into Trump’s business dealings and alleged collusion between Russia and his presidential campaign staff. Or worse, if they try to impeach the president.
A Choppy, Trendless Gold Market
In Wednesday’s session, US gold futures for December delivery settled a shade higher, climbing $2.40 to $1,228.70 a troy ounce, on the back of a weaker dollar.
Investing.com’s daily technical outlook, however, has a “Sell” recommendation for December gold, with charts suggesting a buy only if the contract returned to the 100-Day Moving Average of $1,215.06.
Mike Seery, trader and technical chartist at Seery Futures in Plainfield, Illinois, said:
“At the present time, I'm sitting on the sidelines as this market remains extremely choppy, with no trend despite the fact that we are trading above the 20- and 100-day moving averages.”
Walter Pehowich, executive vice president at Dillon Gage Metals in Addison, Texas, concurs with that, saying:
"It is difficult to find a catalyst that would propel the spot price of gold to the next major level of resistance in the $1,239 to $1,240 area.”
All Might Be In Fed’s Hands
But that could change, depending on what the Fed does. Most traders expect the central bank to hold rates steady on Thursday.
But the language in its policy statement will also be closely watched for what the central bank might do next month. As of Wednesday, fed funds futures showed the odds for a rate hike in December standing at just over 72 percent—a fairly decent probability.
Still, that’s a 10-point drop from a month ago, suggesting gold may still have a chance to survive in this hawkish climate.