Summary:

• Gold has risen to its highest level since June
• The market is now at a similar level to where it was at the last Fed meeting
• Fed set to announce latest policy mix this Wednesday at 7PM (BST) 

Gold prices have been on the rise in recent weeks after hitting there lowest level since March on the 9th July. The decline in the US dollar has been one of the chief causes for this rise, with the global risk sentiment remaining fairly sanguine with stock markets, in the US in particular, holding up well.  

 

 Gold fell sharply after the Fed raised rates at their last meeting with a decline of approximately $75 in the days that followed. However, the market has now recouped the majority of those declines

Expectations for a move from the Fed this week remain low, with the consensus widely expecting that rates will be kept on hold at <1.25% (the absence of a press conference is assumed by many to mean that no major decisions will be announced, with the logic being that major changes in policy will be reserved for meeting at which chair Yellen has the opportunity to elaborate on the changes.) However, members have stressed several times before that all meetings are “live” and with expectations for anything major being so low there is scope for a shock.

With the Fed now on a fairly clearly defined path of rate hikes (there have been two 0.25% increases so far in 2017 after 1 in each of the previous years) traders are looking to less obvious places for unexpected developments. One such policy area that has attracted growing scrutiny in recent meeting is the possibility of balance sheet reduction.

During the three stages of Quantitative Easing (QE) the Fed amassed a huge amount of assets with the balance sheet expanding from less than $900B to $4,500B. Despite ending the asset purchase programme in October 2015, the large quantities of assets that were routinely purchased as part of QE have remained on the balance sheet as the Fed have replaced maturing securities with fresh ones.

The Fed expanded their balance sheet on a large scale following the 08 financial crisis. At their last meeting they outlined the method by which they will reduce it going forward. Will they give further information on when this reduction will begin at this week’s meeting?   

However, at the last meeting Fed members revealed the manner in which this reduction will occur by stating that they will stop reinvesting maturing Treasuries to the tune of $6B per month initially, increasing incrementally by $6B at three-month intervals over 12 months until it reaches $30B per month. As well as the Treasuries the Fed announced a similar plan with its Mortgage-Backed Securities (MBS) which will begin to be tapered at $4B a month.  

Whilst they announced the method by which they will reduce the balance sheet, details on when this reduction will begin appear hazy at best. The only reference so far as to timing was that it would “likely be before the end of 2017”, so this is one area to be particularly aware of for any further information on Wednesday. 

Due to being priced in US dollars, Gold is particularly sensitive to Fed policy and a more hawkish message this week that is suggestive of higher rates or a faster than expected reduction in the balance sheet could see the precious metal come under pressure – as it did following the rate hike and announcement of the method of balance sheet reduction at the last meeting. 

From a technical perspective the picture for Gold is a little muddled at present. Following the US election last year there was a major decline in price which fell down to a low of 1122 last December. Since then there was a sustained recovery with a series of higher highs and higher lows with three of each easily identifiable. However, this pattern was broken when price failed to take out the 1295 high when there was a retest at the start of last month and the subsequent lower low further invalidated it. In falling the market broke down through a rising trendline from last December’s low – this trendline is presently being retested from below.  

 Gold prices are retesting from below a rising trendline from last December’s low at 1122. A bearish reversal around these levels, which may be triggered by a hawkish Fed, would keep the market under pressure and could see further declines. 

 The market seems finely balanced and currently sits at a potentially crucial juncture heading into the Fed. A more hawkish than expected message would keep Gold bugs under pressure but a dovish surprise and break up through the aforementioned trendline and $1260 would be a positive development and could pave the way for further gains.