Among some commodity analysts, sentiment in the gold market has turned decisively bearish as prices readjust to a more certain rate hike outlook on June 13 following strong U.S. employment figures and further upside in the U.S. dollar.
The May U.S. nonfarm payrolls report took economists by surprise over the weekend with 223,000 new jobs created last month compared with the expected 189,000. The unemployment rate also fell to 3.8 percent, marking an 18-year low.
Following the optimistic data release, all signs now point to a June rate hike, Simona Gambarini, Capital Economics analyst said. CME FedWatch Tool is currently showing a 94 percent probability of another 25 basis points hike in less than two weeks.
But, since the rate hike was already largely priced, most investors are now focusing on the Federal Reserve Chair Jerome Powell’s press conferences scheduled for immediately after the FOMC announcement, Gambarini noted.
Key things to watch will be the outlook on inflation and geopolitical tensions: “Investors are not willing to take a much bigger position until the FOMC meeting. They are looking what Powell says during the conference and central bank’s view on inflation. The Fed’s opinion on geopolitics will also be important. If the Fed were to delay hikes or single out geopolitics, then that would be a positive for gold.”
Gambarini projects three more rate hikes this year, bringing the 2018 total to four. She also added that even though rate hikes are a significant headwind for gold, it all depends on the U.S. dollar’s reaction.
“It’s really a dollar story’s weighing on gold prices. If the dollar remains at the current level or falls back, then gold prices should not be weighed down too much by the upcoming hikes,” Gambarini said.
A significant downward driver for gold in the long-term could be the Fed that chooses not to stop monetary policy tightening once it gets to 2 percent, said Colin Cieszynski, chief market strategist at SIA Wealth Management.
“Fed could continue to raise rates every quarter in 2018 and 2019. It might not stop once it gets to two percent,” Cieszynski said.