(Kitco News) - When gold traders return in the New Year next week, they are likely to focus most heavily on the same factor that captured the market’s attention for much of 2015 – Federal Reserve monetary policy.
Specifically, market participants will resume monitoring U.S. economic data -- particularly the monthly jobs report -- and comments from Fed officials for clues on how aggressively policy-makers might tighten interest rates.
Additionally, traders will be watching to see how aggressively money managers position themselves – and on which side of the market – as they return to the market following the holiday season.
Gold weakened for much of the autumn on expectations for the first Fed rate hike in nearly a decade, which occurred on Dec. 16. The metal has stabilized since the day after the hike, helped since policymakers seemed to be signaling a gradual approach.
Gold eased this week in thin holiday trading conditions, with a strong dollar and soft crude oil blamed for declines in recent days. Comex February gold lost 1.5% for the week to finish at $1,060.20 an ounce, while March silver fell 4% to $13.803. Traders said illiquid market conditions meant potential for greater moves than what might otherwise occur since there were fewer market participants on the other side of any trades.
Gold futures finished with an annual loss for the third straight year, after February gold finished 2014 at $1,188.20. March silver stood at $15.77 at the end of 2014.
Markets around the world will be closed on Friday for New Year’s Day, then reopen at the start of next week.
“That’s the start of the next year. They will be focusing on what was the dominant discussion this year – which is the Fed’s outlook on rates and whether or not they are looking at hiking again,” said Howard Wen, precious-metals analyst with HSBC.
To do this, traders will be watching U.S. economic news, especially nonfarm payrolls set for release next Friday.
“That will give us an idea of whether the Fed is raising interest rates (further) sooner or later. That will have a big impact on gold,” said Phil Flynn, senior market analyst with Price Futures Group.
“One of the big negatives for gold (in recent months), of course, was the Fed raising interest rates. That put a damper on it. But if we get weak nonfarm payrolls to start the New Year, it may push back the Fed’s timetable for the incremental increases.”
Early expectations are for nonfarm payrolls to rise by somewhere around 200,000, said a research note from Brown Brothers Harriman. However, due to favorable “base effect,” average hourly earnings are expected to jump to 2.8% year-over-year, which would be the largest increase in six and a half years, the firm continued.
“It will likely sharpen expectations for the second Fed hike in March,” BBH said.
Ahead of payrolls, other major reports will include the Institute for Supply Management’s manufacturing survey on Monday, the ADP private-sector jobs report and ISM non-manufacturing survey Wednesday, followed by weekly jobless claims Thursday. Also, minutes of the Dec. 15-16 meeting of Federal Open Market Committee are scheduled for release on Wednesday, and several Fed members have speaking appearances set for next week.
Market participants will be watching simply to see how hedge funds and money managers position themselves at the start of the New Year, analysts said. Many close their positions ahead of the holidays and year-end.
“I’m looking at the dollar and money flows,” said Charles Nedoss, senior market strategist with LaSalle Futures Group.
“Commodities have been in a downtrend this year. I see that continuing. Let’s see if that abates. That would be the only thing I could see that would happen that could be supportive for gold. But right now, I can’t think of any commodity that there is a shortage of.”
Flynn suggested the first week could go a long way in setting the tone for 2016, or at least the early part of it.
“When traders come back in, I want to see how they’re going to position themselves for the start of the New Year,” he said. “Will they continue on the bearish side of the equation or are they going to start to get more optimistic? I think the first week can kind of tell us where things are going.”
While gold posted its third straight annual loss, many investment banks look for a turnaround in 2016, although not right away. As they released their 2016 outlooks, many suggested gold could remain under pressure during the early months of 2016 before stabilizing.
“As the Fed's path to normalization in its monetary policy becomes clearer as we venture into 2016, I think we may see some stabilization in gold and silver with an eventual move higher into H2 2016, somewhere in the vicinity of $1,175-$1,250,” said Alex Thorndike, senior precious metals dealer with MKS (Switzerland) SA. “In the shorter term, however, things could deteriorate further, although I believe we will see solid support and spec short covering around $975-1,025 and believe this could be advantageous to fade a dip towards there.”
By Allen Sykora of Kitco News; asykora@kitco.com
