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Published : June 01st, 2016
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Category : GoldWire


June 1 2016   

NOSTALGIA NOTE:   The Beatles "Sgt Pepper" album released 49 years ago today.

What Is Holding Back GLD?

Jun. 1, 2016 8:30 AM ET

By Lior Cohen

Rates and the Fed

One of the major issues that has been holding back gold is the possible rate hike of the Fed. And after the release of the minutes of the last FOMC meeting the markets revised up the expectations of a possible rate hike in the near term, as indicated in the following chart.


Source: Fed-watch

As you can see, the chances of a June rate hike have picked up from close to zero to around 30%. And on Friday Chair Yellen pointed out that a rate hike is a possibility in the coming month. For GLD, higher cash rates are likely to translate to a rise in interest rates; and long term interest rates tend to bring down the price of GLD, as I have pointed out in the past.

Despite the hawkish minutes of the last FOMC meeting and Yellen recent remarks, the market isn't ready and the FOMC didn't lay the groundwork for a hike as it did back in 2015 for the December rate hike. Bernanke once said: Monetary policy is 98% talk and 2% action; and up to the recent minutes, the FOMC didn't make it clear enough for the market that they could raise rates in June. But besides communications there is the matter of market conditions, and they aren't too favorable; if any, the U.S. economy hasn't improved by much as data show in the past couple of months: U.S. core inflation has actually come down in recent months -in case the core PCE, which the inflation indicator the Fed follows, is still well below the 2% target (in the last report the core PCE inched down to 1.6%) -- and the last NFP report showed a slower growth in jobs; the GDP for Q1 was also unimpressive - not only in terms of headline growth but also on investments. Therefore, the U.S. economy isn't better off now than it was a few months back. Finally, global economic conditions aren't much better: The Brexit still weighs on the markets and China's economy isn't out of the woods; for the Fed to raise rates right before the Brexit vote could be a poorly timed rate hike, if the British people decide the exit the EU --an event that will push up market volatility; and so far this year market volatility - one the issues that led the Fed to last year's rate hike from September to December - hasn't subsided by much.

So why the Fed released hawkish minutes? It seems to be more a matter of bringing the market towards where the Fed is at. It also makes things simpler for the Fed to have the market convinced it aims to raise rates and then not follow through; as oppose to have the market cross off any possible rate hike in the near term.

This week's upcoming NFP report could set the stage as to whether the Fed will be more incline to raise rates in July. Currently, the market expects a gain of around 163,000 jobs - not far off the growth in jobs recorded a month back - and wages to edge up by 0.2%, month over month. If the report comes short of market expectations on both growth in jobs and wages, this could be enough to bring back up the price of GLD (ON THE SHORT TERM / SPIKE), as was the case in the past.  

And considering this report will come before the highly anticipated FOMC meeting, this report could have much stronger impact on the direction of GLD than in the past.

But even if the report falls short of market expectations, which is likely to have a short term positive impact on GLD, going into the FOMC meeting on June 14-15, the gold market could still remain flat: Even though the June meeting isn't likely to result in a rate hike, the Fed could still set the groundwork for a July rate hike. And then if core inflation starts to pick up again, the labor market remains on solid ground, GB remains in the EU and market volatility slightly subsides, then the Fed will be more incline to raise rates by then. And higher interest rates are likely to keep curbing down the demand for gold.

In conclusion…

GLD could bounce back by the end of the week if the NFP report comes short of market expectations. But even if the report shows disappointing figures, the market will still expect for a hawkish statement by the Fed. Until the FOMC meeting on June 15th, it’s a battle between the USD and gold.

Gold for remainder of the week by GoldTrends.

Look for support in the 1205-1208 area and resistance near 1220.   If gold breaks below 1198 then 1172 becomes the target.  If gold holds 1205-1208 and rallies back above 1225, then higher prices to 1240-1255 would be the odds favored.   That area marked resistance is where gold needs to conquer.



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