Gold Bulls Find Their Voice After Significant Uncertainties Weaken June Rate Hike

Gold lost its shine in May after indications emerged that the U.S. Federal Reserve was seriously considering raising interest rates because the economy appears to be on a stronger path to recovery.  An increase in interest rates often spells doom for gold because it makes gold less attractive to hold in relation to other assets that pay an interest – gold doesn’t yield an income and it sometimes costs money to hold and store physical gold.

Gold Bulls Find Their Voice After Significant Uncertainties Weaken June Rate Hike

Gold investors had reasons to smile to the banks in the first quarter of the year after the precious metal recorded more than 17% gains to erase the 11% losses from 2015. Irrespective of your trading platform or the level of your exposure to the market, you’ll agree that precious metals and gold in particular have had a splendid performance in 2016. Gold has outperformed equities, bonds, and currencies as shown in the chart below.

Gold Bulls June Rate Hike

Nonetheless, the hopes of a June rate hike were dashed last week on Friday when the Labor Department revealed that U.S. employers added 38,000 jobs in May. The number of jobs added in May marks the lowest job gain in the last five and a half years.

Interestingly, many gold short and hedge funds had held out hopes that the weak May jobs report was an anomaly and that the Fed will continue with its plan to raise interest rates next month. . The markets were quiet in early morning trade on June 6 ahead of Fed Chair, Janet Yellen’s speech at the World Affairs Council of Philadelphia. The speech would be the last measuring gauge that Wall Street will have on the Fed’s thought process ahead of next week’s policy meeting.

However, in the speech, Yellen noted that its index on labor market conditions crashed to the lowest point in 7 years to confirm the incredulously weak jobs number that was reported in May. She also noted that there is now “significant uncertainties”  hanging over the plan to raise interest rates going forward.

Fed adopt cautious outlook on interest rates

Gold investors have been staying on the sidelines as they look out for signals on the kind of action that the fed might take in interest rates when it meets in the middle of June. In the speech, Yellen notes that a rate-hike is still in the works but she didn’t give a timeline on when the Fed might want to raise interest rates.

Analysts were quick to make inferences from the speech on how the fed is likely to act when it meets next week. For instance, James Steel, chief metals analyst for HSBC Securities notes that “Janet Yellen’s cautious jobs comments helped reaffirm the view that the Fed may hold off from raising rates at next week’s FOMC meeting… In the near term, there may be more room to the upside as market sentiment has shifted from favoring a near-term rate hike to a more even split between those expecting a rate rise this month and those looking for one later in the year.”

On Monday, Spot gold climbed to two-week high of $1,248.40 and Gold for August delivery rose to a high of $1,251.30 an ounce after Yellen doused the flames of an increase in interest rates next month. Tuesday morning, spot gold declined by 0.3% to $1,241.40 an ounce and gold for August delivery declined by 0.2% to $1,244.40 an ounce. Nonetheless, the bullion is having a better performance in June as it sports about 2.3% gains this month compared to the 7% decline in May.

The bullish camp for gold has found its voice

Gold was enmeshed in the tight grip of a pullback throughout May and the bullion lost more than 7% in its trading price that month. The weakness in gold prices last month forced many gold bulls into hibernation as many of them withdrew to the sidelines to enjoy the gains that they recorded in the first quarter of the year.

However, it appears that gold might cast off its gloomy garments and soar in June after the weak employment numbers has weakened that chances of a June rate hike. Last Friday (June 2), the Fed-Funds Future tracker by CME Group placed the chances of a June rate-hike at 3.2% down from 21% in the previous session (Thursday June 2). Needless, to say, gold bulls are staring to become vocal about their bullishness on the precious metal.

Todd Gordon, founder of TradingAnalysis.com while speaking on CNBC’s “Power Lunch” noted that “Gold is reflecting the Fed’s complacency here going into these summer months. I don’t see a Fed rate hike…That should put a top on the dollar and push gold higher.” Another analyst, Boris Schlossberg, managing director of FX strategy at BK Asset Management notes that “Gold is at a critical juncture right now, holding that $1,200 support… If it can hold that, then it will begin to rally and most importantly, if gold can break the $1,300 to the upside, it’s just a screaming buy.

A word of caution though

However, despite the renewed bullish sentiment on gold, smart investors might want to exercise some caution until most of the volatility in the market has eased out. To start with, Wall Street is only speculating (with good reason) that the Fed won’t raise interest rates next month; yet, until the Fed meets, a rate hike is a possibility.

In addition, a mix of sentiment, market fundamentals, and economic data often influences the gold trade. The financial markets are still awaiting the release of a number of reports of economic importance this week. Any of those data reports could throw pleasant/unpleasant surprises that could significantly change the narrative on the gold outlook – the same way an unexpected poor May jobs number dashed the hopes of an increase in interest rates in June.

More so, hedge funds are caught in a dynamic game of shorts VS longs and they are increasing their short trades while reducing their long trades – long positions have fell to 15.5 million ounces in May. Hedge funds are also being forced to rollover their positions on long gold contracts instead of taking delivery of physical gold as those contracts start to mature.  Brad Yates, head of trading for Elemetal LLC, one of the biggest U.S. refiners told Bloomberg that “There’s massive speculative position starting to roll, so they (hedge funds) are selling June and buying August.”