Phil Flynn
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Phil Flynn

Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665

[Allen Sykora, Kitco News]

The recent retreat in gold prices probably is not over, with the Federal Reserve sending a message to markets that policymakers are not done hiking interest rates just yet, analysts said.

Views are more mixed on whether a further decline is a correction or something more ominous, such as an outright bear market.

Comex December gold, at the session low of $1,285.30 an ounce, has lost nearly 6% of its value since the one-year high of $1,362.40 on Sept. 8. Much of the sell-off has been blamed on recent communications from the Federal Open Market Committee suggesting that policymakers are still learning toward more future rate hikes, both at a meeting last week and speech by Fed Chair Janet Yellen on Tuesday.

“The correction is going to continue because the Fed seems bent on continuing their scheduled rate hikes,” said George Gero, managing director with RBC Wealth Management.

This was a surprise to the markets, Gero said, especially considering worries about the impact of hurricanes that have hit Florida, Texas and Puerto Rico. The financial markets have gone from factoring in roughly a one-third probability of a December rate hike as of the end of last month to roughly a three-quarters probability now.

Robin Bhar, metals analyst at Societe Generale, also sees further price weakness but as part of a bearish trend, rather than simply a temporary correction. The yellow metal could fall back into a range of between $1,250 to $1,200 an ounce, he said. As of  late Wednesday morning, spot gold was around $1,286 an ounce.

“We believe it [recent price weakness] is a reversal, so more than just a correction,” Bhar said. “We do believe there will be a continued downtrend for gold. So we do see lower [prices] predicated solely due to the monetary tightening by the Fed in the U.S.”

Not only is there a “high probability” of a U.S. rate hike in December, but the so-called dot-plot – which charts expectations of individual Fed members – suggests policymakers still envision three rate hikes next year. All of this means higher bond yields and a higher dollar, Bhar explained. These tend to hurt gold.

Still, he listed some potential factors that could come to the rescue of the yellow metal. One would be if the Fed hikes in December but then becomes more dovish on its views for monetary policy in the future. Second, a flare-up in geopolitical tensions could mean renewed safe-haven buying of the yellow metal, he said, citing North Korea and the Middle East, plus political uncertainty continues in the U.S.

Meanwhile, Phil Flynn, senior market analyst with at Price Futures Group, suggested that a correction may be nearly over in a longer-term bull market for gold. The weakness began with the perception that the Fed will continue to tighten monetary policy even though officials may be less worried about inflation than in the not-too-distant past, he explained.

“Having said that, once the Fed stops worrying about inflation, that’s exactly the time you should start worrying about inflation, right?” Flynn said. “So we think the possibility that you will see an inflation run on gold should give us a little bit of a run [higher].”

Flynn said he looks for the recent weakness in the U.S. dollar to abate.

“That should let gold start going back up,” he added. “On top of that, the geopolitical risk factors that generally favor gold are still out there.”

Looking into next year, Gero commented that gold could be bought as an inflation hedge. He pointed out that the government has to find a way to pay for rebuilding after a heavy hurricane season, plus food prices could rise as a result of damage to growing areas.

“That means we’re going to have more imports into supermarkets when it comes to food,” Gero said. “That means more inflation. That means the Fed could continue to raise [rates], but you might see something different where you’re going to have higher inflation and the possibility of higher gold prices next year because of inflation and because of fears.”

http://www.kitco.com/news/2017-09-27/Analysts-Gold-Prices-Could-Lose-More-Luster-Due-To-Fed-Worries.html

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