A possible bottoming out in inflation and the Fed repricing of a December hike are outright bearish and gold should rebase lower. To this end, the median Fed participant continues to look for one more hike this year (in our opinion December), and three more hikes in 2018. The 2019 median path was trimmed from three hikes to two, offsetting the somewhat hawkish near-term message.
Gold price is usually highly subtle to rising U.S. interest rates, which raises the opportunity cost of holding non-yielding bullion while boosting the greenback.
The market expectations, however, are quite different. Still awaiting a stronger confirmation of a sustained upward trend in inflation, the market is only pricing in less than two full hikes by December 2018, which seems overly pessimistic given the upbeat economic backdrop.
This complacency on the Fed is mostly due to the fact that the Fed had signaled its rate decisions would be primarily driven by inflation, which until August surprised to the downside over five consecutive months.
A softer dollar can weigh on yellow metal price, whereas dollar robustness reflects in the stronger commodity prices.
Comex gold futures dropped to their lowest level since August 9th at $1,270.05 a troy ounce before bouncing back to trade a shade higher at $1,273.02 by 0700GMT.
The repricing is already taking hold. Three weeks ago, the rate markets priced no hikes through 2018; today it’s almost two. December hike probabilities have now risen to almost 63% from 28% just two weeks ago. But we expect more, as a result, gold prices are likely to trim its price gains in the consolidation phase. Hence, we advocated shorting futures contracts of XAUUSD using far month tenors that would encompass above stated fundamental news, thus, stay short Dec’17CME gold.


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