Editor's Note: The article was updated to include comments from George Milling-Stanley,head of gold investment at State Street Global Advisors.
(Kitco News) - The gold market -- expecting extremely dovish comments from the Federal Reserve Wednesday, following its monetary policy meeting, could be disappointed, creating some selling pressure according to some analysts.
Comex February gold futures pushed to nearly a three-month high Tuesday as the U.S. central bank started the first day of its two-day meeting and last traded at $1,118.3 an ounce.
According to some analysts, gold prices are benefiting in part because of shifting interest rate expectations. In December, the Fed indicated that they expected to raise interest rates four times in 2016 with the next rate hike scheduled for March.
However, increased turmoil in global financial markets has caused markets to pare back those expectations. Fed fund futures are pricing in a 13.1% chance of a rate hike in January and a 27.4% chance of a move in March.
Although economic uncertainty has risen in recent weeks, some analysts have said a dovish tone in Wednesday’s statement could be limited as the Fed is expected to highlight strength in the domestic economy and labor market.
Economists at BNP Paribas said that they would measure a dovish statement if the central bank acknowledges the increased economic risks without mentioning expected reliance in the medium term, an unlikely scenario.
“Central banks move more slowly than markets. Those expecting a strongly dovish statement are likely to be disappointed by fewer changes,” they said in a report Monday.
BNP Paribas outlook appears to be the consensus among economists and analysts. Chris Beauchamp, senior market strategist at IG Markets, warned that investors should be careful about trying to interpret dovish tones in Wednesday’s statement as he expects the central bank will try to find a balance.
“I think the Fed will acknowledge the situation has changed but still signal some optimism. I don’t think we will see any comments about reducing rate hikes this year,” he said.
Beauchamp added that if gold does see some selling pressure with a tempered dovish statement, any weakness could be a positive buying opportunity.
“The gold market looks pretty good at the moment and there is good buying on dips,” he said. “I think we could see more buying if prices dip back to $1,100 an ounce.”
Ole Hansen, head of commodity strategy at Saxo Bank agreed that that there are less aggressive interest rate expectations but as this is only the first meeting after raising rates by 25 basis points, the Fed is not ready to shift its policy.
“The market is forcing the Fed’s hand and I think there is the possibility that markets could be disappointed. That would push the U.S. dollar higher and pressure gold lower,” he said.
However Hansen also agreed that any fall in gold would be a good entry point for investors as gold has retraced almost 50% of its October to December selloff.
Not everyone is expecting gold prices to selloff on the Fed meeting. George Milling-Stanley, head of gold investment at State Street Global Advisors, said that because of shifting market sentiment he is optimistic that gold’s rally can continue through the Fed’s monetary policy meeting.
“I don’t think gold has anything to fear from the Federal Reserve right now,” he said. “If the Fed is as dovish as they were in December I think prices could move higher. I don’t think the Fed is going to be very aggressive at this meeting.”
Although the Fed raised interest rates by 25 basis points, the committee also said “the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Milling-Stanley explained that regardless of the Fed, gold is benefiting because investors are reducing their appetite for risk.
By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C
