Stagnating gold could see boost on Fed decision

On Thursday, the Bank of England held interest rates and monetary policy steady, as widely expected, but still kept the door open for further possible easing this year. Attention has now turned to the US Federal Reserve, as well as the Bank of Japan, ahead of their potentially pivotal meetings next week.

Ahead of the Fed meeting, a plethora of US economic data was released on Thursday, mostly worse than expected, which generally did not bode well for the prospects of a US rate hike by an already skittish Fed. Most notably, retail sales, core retail sales, the Producer Price Index, and industrial production were all significantly lower than expected.

One more major economic data point will be released before the Fed’s decision on September 21 – Friday’s Consumer Price Index reading for August. This inflation measure is a key component in the Fed’s discussion, but unless the reading is unexpectedly and significantly higher than forecast, the decision to keep rates on hold once again will likely have already been made.

If this is indeed the case, and even more so if the Fed continues to abide by its apparent “lower-for-longer” stance when it comes to interest rates, one of the primary assets that would clearly be in the position to benefit the most is non-interest-bearing, dollar-denominated gold. In a prolonged low-interest-rate global environment, particularly if the US dollar is also pressured as a result, the appeal of gold generally rises.

Such a rise has been manifested for the past nine months with the price of gold making a steady recovery from the $1050-area multi-year lows of late last year. This recovery has formed a rough parallel uptrend channel on the charts, which has framed the precious metal’s general bullishness within those months. In the past two months, however, the price of gold has been trading in a pullback from July’s $1375-area high. This pullback has formed a descending trend line, which was re-tested just last week on a surge up to the $1350 resistance level that was driven by weak US economic data. Since then, the price of gold has seen a short-term retreat from that resistance level, but another expected postponement of a Fed rate hike next week could lead to a strong rebound. In this event, gold could potentially break out above the noted downtrend line and $1350 resistance level, in which case the next major upside targets are at the mentioned $1375 high, followed potentially by the $1400 psychological resistance objective.