FxWirePro: The latest G3 central bank and gold catalysts

The last month, in the gold market, has been dominated by central bank catalysts with the ECB meeting on September 8 and BoJ and FOMC meetings nearly two weeks later on September 21.

The prices in bullion bounced off four-month lows on Friday, but the precious metal remained under pressure as growing hopes for a U.S. rate hike before the end of the year continued to boost demand for the dollar.

On the Comex division of the NYME, gold futures for December delivery were up 0.14% at $1,254.85.

A key concern, mostly expressed by this summer's mini ‘taper tantrum’ in sovereign bonds, was that G3 aggregate monetary policy would begin to turn neutral and slightly less accommodative.

To this end, both the BoJ and ECB broadly disappointed on easing policies relative to expectations while the Fed delivered a more hawkish than-expected hold decision.

In Japan, the BoJ left all the policy tools rather unchanged, keeping the deposit rate at -0.1% and its annual asset purchases at ¥80trn, but made some key adjustments.

The BoJ would now incorporate yield levels and the curve shape rather than QE as a key consideration going forward and has pledged to keep 10-yr JGB yields at around 0%, effectively turning the central bank from a willing buyer to a price-setter.

The QE program will be maintained at ¥80trn but this is flexible while the BoJ also promised to keep the monetary base growing until inflation “exceeds” 2% and stabilizes at those levels.

As the range bound trading post FOMC and sell-off over the past couple days illustrates, it appears to us that after a plethora of catalysts over the last month, the outlook for gold seems a bit uninspired in the immediate near-term.

Like a spoiled child, gold has recently needed more and more encouragement to trade higher. Now, with all the September central bank decisions in the rear view mirror, the risks of gold trading lower rather than higher in the next three months have risen, in our opinion, adding downside risk to our 4Q16 price forecast.

While we still believe the upcoming US election and the potential for safe-haven buying as a hedge could lead to some upward pressure in the upcoming month, from a trading perspective we will be looking to exit at least some of our more tactically-recommended near-term length on any short-term rallies.

For us, given the relative lack of foreseeable catalysts, the outlook for the metal in the short-term remains indistinguishably linked to the US interest rate expectations and, barring any unforeseen labor weakness over the upcoming job reports, our expectation of a US rate hike in December has the potential to drag gold prices sub-$1,300/oz on a spot basis in Q4.