Wednesday, 8 March 2017
What really moves gold prices?
Up and down, up and down… and the story goes on and on. Yes, we are indeed talking about commodities. And for this very special occasion, we will focus in gold.
The yellow metal is currently trading just above a two-week low as expectations for a rate hike from the Federal Reserve continue to increase day after day.
Fed funds tracked by CME Group’s FedWatch tool place odds for a rate adjustment at more than 80 percent, which is enough to push bullion prices to the downside until the meeting.
In case you are not familiar with gold, you should know that the precious metal is very sensitive to moves of US rates. Why? Because higher rates translate into a stronger dollar, in which gold is denominated. That way, gold becomes a more expensive non-yielding assets for investors.
To understand how to trade gold in this context, you have to keep in mind the key factors affecting the metal. From a fundamental standpoint, you should keep an eye on the following:
The American regulator will meet on March 14-15, meaning there is not a lot of time left for the encounter and every single release matter. However, the Federal Open Market Committee keeps two favourites: consumer price index and nonfarm payrolls. Both have been developing positively in the last few month, but before the meeting there is one more event to watch: February’s nonfarm employment on Friday. If the report surpasses expectations, chances for a rate hike will spike and gold will come under pressure. Better keep the TV on that day.
Wall Street top indexes are holding at all-time record highs after weeks of speculation on higher fiscal spending, deregulation of certain industries and a still-to-come tax reform. The killer combo is expected to increase inflation and economic growth, creating a suitable environment for higher rates. In other words, there measures put gold under pressure. But that’s only one side of the story. Trump administration has also created huge controversy over some executive measures such as the travel ban, which exposed a polarized society and nation wide protests. And well… Wall Street folks don’t like social movements because they are unstable.
It really doesn’t matter if it’s North Korea launching a series of ballistic missiles or Trump ruining relations with NATO countries, it all comes to one thing: uncertainty and fear. Both elements that are extremely positive if you are trading gold futures.
France, the Netherlands and Germany will hold presidential elections this year. And just like it happened in the United States back in November 2016, conservative parties are ahead in polls, threatening the so-called political elites and status-quo. While it actually played quite well for US markets, we still cannot estimate same results for European economies. Therefore, uncertainty raises and safe-havens such as gold benefit from a strong demand.
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