FxWirePro: Short hedge in yellow metal on waning safe-haven sentiments as Fed hiking season looms

Gold prices have tumbled from the highs of peaks of 1295.14 to the recent lows 1215 levels or 6.2% in just three weeks.

Stay hedged via shorting CME Gold futures of Dec’17 delivery as the yellow metal hit its least since March 15 at $1,214.30 on Tuesday on waning sentiments of demand for safe-haven assets.

We have already labelled our bias to enter short trade recommendations in gold and silver but decided to hold off given the looming first round of the French elections the ensuing weekend (Metals Weekly Gold and silver bulls received some gift-wrapped headlines last week but higher US rates will eventually spoil the party, Shearer et al., 19 April 2017).

For today, gold prices edged higher in European trading session but held near their lowest level in around eight weeks amid growing expectations for a U.S. interest rate hike next month. The metal is highly sensitive to rising U.S. interest rates.

The elections passed largely as expected and US 10 year yields have bounced back after dipping below 2.2% in mid-April, spurring gold to ease of its recent highs around $1,290/oz.

However, we believe the fundamental backdrop remains supportive and that yields have even further to rise on the back of stabilization in US data.

Indeed our baseline forecast calls for the US 10-year yield to reach 2.7% by the end of June, embedding a Fed rate hike at the June FOMC. Given this outlook for higher yields, we recommend entering a short position in gold.

One could also use this trade on speculative grounds by shorting Dec’17 CME gold at spot level for the target upto $1,180/oz with a stop loss at $1,242/oz.

Went short Dec’17 CME gold at a price of $1,280.10/oz on April 26, 2017 for the same trade target and stop loss level. Marked to market on May 4, 2017 at $1,238.30/oz for a gain of $41.80/oz or 3.3%.