Business

This May Be The One Most Bullish Factor For Gold

Gold prices started to slide on Tuesday, coming off their nearly-one-week high as traders wait anxiously for the next U.S. monetary policy meeting, which is set for Wednesday. Meanwhile the U.S. dollar dipped to a one-week low on Tuesday, marking the second session of declines in a row.

bullish factor for gold
istara / Pixabay

The Federal Reserve is expected to hike interest rates again on Wednesday, but the ongoing volatility across the market has led some to believe this could be the last rate hike for a while. Analysts say gold should benefit from the widespread volatility in the near term — especially in equities.

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q3 hedge fund letters, conference, scoops etc

Gold prices supported by market uncertainty

In his "Precious Metals Daily" report on Monday, HSBC analyst James Steel the uncertainty in the financial markets should keep a floor on gold prices. He noted that as the U.S. dollar weakened, gold prices rallied and shifted higher.

Declining equity prices also helped support bullion, he added, although today has brought about an early rally in stocks as major U.S. indices began to climb out of the gate this morning. According to Steel, as the declines in the equity market become more pronounced, gold prices should gain better traction and shift even higher.

However, today has brought a rebound in equity prices as the S&P 500, Dow Jones Industrial Average and NASDAQ 100 are all rallying early. This threatens to undo his thesis, at least for the near term. Nonetheless, stock prices have been reversing course so much these last weeks that it's anyone's guess what they will look like tomorrow.

The most bullish factor for gold (possibly)

Despite other factors like monetary policy changes and currency movements, Steel believes "renewed equity market wobbles" could be the single biggest bullish factor" for the yellow metal.

"If equity markets continue to weaken and financial market volatility rises, gold is likely to be supported," he wrote.

He added that geopolitical events like Brexit have not had much impact on gold prices, but they could at some point, possibly early next year.

"The [gold] market is moving to the upside and has been broadly higher since mid-November," he added. "But higher rates and a firm USD should provide headwinds to rallies. We look for prices to steady but hold through the FOMC."

Looking to monetary policy updates tomorrow

Bloomberg estimates that a rate hike on Wednesday is about 75% priced in, and consensus is now looking for the Fed's projections to be revised lower to only two rate hikes next year instead of three.

"If the market is already positioned for a 'dovish hike' tone from the December meeting then this is largely to gold's benefit," Steel wrote. "Also fresh criticism of the Fed today from the U.S. administration ahead of the FOMC may lend a little support to gold by injecting fresh economic uncertainty."

He was referencing President Donald Trump's overnight tweet, in which he said it was "incredible" that the Fed was even thinking about continuing to tighten policy based on the current market and political uncertainties.

This article first appeared on ValueWalk Premium