A Hawkish Fed Tone Could Take Nugget From Gold Price

By David Hodari Features Dow Jones Newswires

An unexpectedly hawkish Federal Reserve could put significant pressure on the price of gold and push the metal to $1200 a troy ounce, some analysts say.

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Metal investors have all but priced in expectations that the Federal Open Market Committee will increase interest rates when it concludes its meeting Wednesday, helping send the gold price down 1.65% since last Tuesday.

On Wednesday, weaker-than-expected U.S. economic data decreased the chance of the Fed being more hawkish than expected, which helped send the gold price up by 0.87% to $1,276 a troy ounce in London trading. But any sign of unanticipated hawkishness and gold could take a big knock, some analysts say,

The gold price tends to fall when rates go up because it becomes less competitive against yield-bearing assets and because U.S. increases boosts the dollar, which makes the greenback-denominated commodity more expensive for most buyers.

If the U.S. central bank raises rates as expected, Fed funds futures are only pricing in two more rate increases until the end of next year, according to Carsten Menke, a commodities analyst at Julius Baer.

"If the rhetoric is hawkish, then that will support the dollar and have an impact on treasury yields," said Xiao Fu, an analyst at BOCI Global Commodities. "That, in turn, will have a lead on impact on gold."

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A hint at any more than two additional rate increases before the end of 2018, could see gold slump to $1,200 a troy ounce -- which would be a nearly 5% fall to lows not seen since the middle of March, Mr. Menke said.

Gold has benefited as U.S. political uncertainty has put pressure on the dollar and sent investors into gold, which is also a traditional safe-haven.

The WSJ Dollar Index, which measures the dollar against a basket of currencies, has fallen more than 5% year-to-date.

Even if the effect of a Fed rate raise is small, it could combine with other factors and catalyze a sell off.

"The summer season tends to see gold slightly soften, with a lack of festivals in India and China and slower period of demand in the Muslim parts of the world," said James Moore, an analyst at FastMarkets.

"This early-summer softness could coincide with hawkish language from the Fed to take gold as low as $1230 an ounce [a 3% drop]," Mr. Moore said.

The price of gold was up 0.62% at $1,273.88 a troy ounce in early afternoon trade in London.

Write to David Hodari at David.Hodari@dowjones.com

(END) Dow Jones Newswires

June 14, 2017 11:34 ET (15:34 GMT)