Commodity Update; Crude Oil – 19 September 2014

Gold closes the week lower, traders disregard Yellen on rates

Gold posted another sharp drop this week in response to FOMC comments on US economic health at Wednesday’s meeting, despite there being no material change to the policy outlook here.

From the market reaction it would appear that investors are now discounting the rhetoric of policy makers in preference of a more fundamental focus.

With lower unemployment beginning to translate into stronger consumer confidence data and higher consumer spending, investors now appear to be positioning for policy changes in the opening quarters of 2015 as well as a much steeper climb in rates than many had previously expected.

The is supported by alterations to the FOMC’s medium term interest rate outlook, which now implies a hike in the Federal Funds rate from 0 to 1.35% by the close of 2015. The revised forecast is somewhat higher than the 1.125% projection announced in June.  

While most forecasts now suggest that an accelerated tightening cycle is likely, some private sector projections indicate an underlying expectation of even sharper tightening from the Fed, with some suggesting that rates could close out 2015 as high as 1.75%.   

Clearly this would mark a further turn of the pages in the current chapter of post crisis economic history, which is positive for investors over the longer term.

On the downside, gold would be likely to suffer once again as a healing US economy reduces the need for crisis insurance.

In addition to this, a repeat of June 2013 would also be quite likely, with higher investment grade yields in the developed world leading to outflows from many of the more fragile emerging markets. This could lead some EM currencies to come under pressure and effectively diminish the gold discount available from any initial weakness, thus reducing incentives for physical buyers.   

Looking to the week ahead, US durable goods and home sales data could provide the impetus for further selling on the futures market, while the ongoing presence of numerous geo-political and conflict risks offer to offset scope for bearish sentiment to become counterbalanced.

In the absence of a reawakening of tensions over Ukraine, or a further escalation in the middle east, we would expect gold prices to continue to drift lower toward the $1200 & $1180 levels.

Spot Gold


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