Gold Market Doesn't Believe Fed Optimism - Analysts

(Kitco News) - Although the U.S. Federal Reserve left the door open for a potential interest rate hike in September, according to analysts, markets don't believe the renewed optimism as gold is higher and both the U.S. dollar index and bond yields lower on the day.

Gold prices are down from their earlier session highs but are still holding onto gains after the Fed left interest rates unchanged Wednesday but had a slightly more upbeat tone, saying, "Near-term risks to the economic outlook have diminished."

August Comex gold futures last traded at $1,337.20 an ounce, up 0.79% on the day. At the same time U.S. 10-year bond yields last traded at 1.52%, flat on the day. As of 10:30 a.m. EDT, the U.S. Dollar index was trading at 96.470, down 0.6% on the day.

Bart Melek, head of commodity strategy at TD Securities, said one of the reasons why gold is up on the back of a weaker U.S. dollar and bond yields is because markets were expecting a more hawkish tone.

"The economic data had been relatively positive the last few weeks and they were expecting something more explicit," he said. "They were certainly less dovish than the last meeting but they were not as hawkish as markets were expecting."

Melek added that in this environment his firm remains bullish on gold as they are not expecting the Fed to raise rates until mid-2017. He noted that prices have room to move higher as his firm expects gold prices to average the third quarter at $1,350 an ounce.

"Yes a September rate hike is a possibility but I don't think that is going to happen. I don't think the Fed even knows what it wants to do."

Jonie Treves, precious metals analyst at UBS, agreed that gold is reacting to the fact that the market was expecting a much more hawkish tone. Although there are some expectations of a September move, she said that UBS economists aren't expecting a move until December.

George Gero, managing director with RBC Wealth Management, was even more critical saying that there is no question the market doesn't believe the Fed will hike rates in September.

"They had to keep a rate hike on the table because they need something on the table," he said. "But I am not listening to the Fed. The bond market is telling the story and with falling yields they are saying that there is no rate hike this year."

While there is still a lot of focus on the Federal Reserve’s monetary policy decision, Nigam Arora of The Arora Report warned investors to not forget about the Bank of Japan.

“Over 80% of buying in gold and over 95% of buying in silver after the Fed decision yesterday was short covering,” he said in an email statement to Kitco News. “Since there was no real buying that led to the sharp rise in precious metals, without a catalyst to further the short squeeze, metals have given up a big part of their gains. The next big catalyst for precious metals will be Bank of Japan’s action tonight.”

Courtesy: Kitco News