FxWirePro: Fed repricing stimulates bullion bears – Stay short in Gold futures of far-month tenors

A possible bottoming out in inflation and the Fed repricing of a December hike are outright bearish and gold should rebase lower. To this end, the median Fed participant continues to look for one more hike this year (in our opinion December), and three more hikes in 2018.

Gold prices pared gains after touching a two-week high on Thursday after Republicans in the U.S. House of Representatives unveiled legislation to overhaul the U.S. tax system.

The bullion prices are edging down on Friday morning as the President Donald Trump nominated Jerome Powell to chair the Federal Reserve on yesterday.

Gold futures on the Comex division of the NYME for December delivery dropped 0.10% to $1274.72 a troy ounce by 8:25 GMT.

Investors also focused their attention on the nomination of a new U.S. Federal Reserve chair, who could influence the pace of future interest rate increases.

The 2019 median path was trimmed from three hikes to two, offsetting the somewhat hawkish near-term message. The market expectations, however, are quite different.

Still awaiting a stronger confirmation of a sustained upward trend in inflation, the market is only pricing in less than two full hikes by December 2018, in our opinion, which seems overly pessimistic given the upbeat economic backdrop. This complacency on the Fed is mostly due to the fact that the Fed had signaled its rate decisions would be primarily driven by inflation, which until August surprised to the downside over five consecutive months. The repricing is already taking hold.

Three weeks ago, it seems the rate markets priced no hikes through 2018; today it’s almost two. December hike probabilities have now risen to almost 63% from 28% just two weeks ago. But we expect more. The four Fed-related corrections so far this year averaged sell-offs of $28/oz, $58/oz, $76/oz and $84/oz each, with the current sell-off surpassing $50/oz so far.

Considering the higher starting point, we believe the downside trade has room to play out further. While further weakness in the broad dollar and re-escalation of political tensions could lend some support to bullion prices, we continue to caution against holding gold as a political hedge during the global rate normalization cycle.

Went short Dec’17 CME gold at a price of $1,318/oz on September 20, 2017. Trade target is $1,190/oz with a stop at $1,384/oz.