FxWirePro: Bid for short hedge in bullion prices as Fed’s June hiking expectation looms

We know that the safe haven sentiments in bullion markets have faded away in the recent past. But from the last Friday or so the losing streaks of gold prices have been restrained despite investors’ expectations that the Federal Reserve is poised to increase its benchmark rate in June. Moreover, China contends with India as the world's highest gold importer and accounts for about 40% of world’s industrial metal demand.

As a result, we’ve already advocated staying short in Dec’17 CME Gold On April 19, we flagged our bias to enter short trade recommendations in gold and silver but decided to hold off given the looming first round of the French elections the ensuing weekend (Metals Weekly Gold and silver bulls received some gift-wrapped headlines last week but higher US rates will eventually spoil the party, Shearer et al., 19 April 2017).

Well, Gold for June delivery on the Comex division of the NYME rose 0.35% to $1,234.34 a troy ounce. 

The elections passed largely as expected and US 10 year yields have bounced back after dipping below 2.2% in mid-April, spurring gold to ease of its recent highs around $1,290/oz. However, we believe the fundamental backdrop remains supportive and that yields have even further to rise on the back of stabilization in US data.

Indeed our baseline forecast calls for the US 10-year yield to reach 2.7% by the end of June, embedding a Fed rate hike at the June FOMC. Given this outlook for higher yields, we recommend entering a short position in gold.

Went short Dec’17 CME gold at a price of $1,280.10/oz on April 26, 2017. Trade target is $1,180/oz with a stop loss at $1,331/oz. Marked to market on May 12, 2017 at $1,240/oz for a gain of $40.10/oz or 3.1%.