How to Trade Gold Following the Latest Federal Reserve Actions

Gold (GLD) is one of the few commodities that provides investors and traders with different kinds of exposure. Some people invest in physical gold while others trade the stocks of gold mining companies. You can also get an exposure to gold through futures, spread betting, options, and forex pairs.

Irrespective of your kind of exposure to gold, your trading profits or losses will largely be determined by the price of the underlying gold bullion in the global spot market.
Interestingly, gold has started facing increased volatility in the last couple of weeks in response to the deluge of mixed U.S. economic data and chatter about a potential rate hike.
How to Trade Gold Following the Latest Federal Reserve Actions
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The U.S. Federal Reserve has held its September FOMC meeting last week and it has decided to leave interest rates unchanged.

How can you identify the volatility trends in gold in order to make informed trading decisions?

Gold shines brighter after Fed postpones rate hike decision

Last week, the Federal Reserve made a decision to leave interest rates unchanged in a dovish statement. In the build up to the September policy meeting, the Fed has been asserting its readiness to raise interest rates, but last week's dovish stance seems to follow the voice of reason.

The deluge of mixed economic data for August has weakened the Fed's resolve to raise interest rates. For instance, the data on the Consumer Price Index for August erased the bullish sentiments that investors might have developed in response to the retail sales data. In August, U.S. consumer price index increased by 0.2% to beat the consensus economists' expectation of a 0.1% increase.

In addition, August retail sales data was uninspiring as retailers reported a 0.3% decline in sales to $456.32 billion in August. The poor retail sales data suggested that Americans weren't spending more than necessary on essentials and it indicates that people are less optimistic about the economic outlook.

The Fed made a logical decision not to raise interest rates and safe-haven investments such as gold are better off for it. The yellow metal booked a decent 1.7 percent gain when the news of the Fed's dovish stance broke.

The dovish interest rate outlook and the attendant gains in gold are already forcing the U.S. dollar lower. The dollar index, which tracks the U.S. dollar against a basket of 6 currencies, lost its footing to mark the lowest level since September 12.

Here's where analysts think gold is headed

Neil Wilson, an analyst at ETX Capital, notes that "speculative traders with an exposure to gold in the forex, spread betting, and binary options market have found a sense of direction in the outcome of the last fed meeting." The Fed Fund Future currently has the odds of a rate hike at 20%, suggesting that the Fed is not likely to raise interest rates until December 2016.

Analysts at Australia & New Zealand Banking Group Ltd have also opined that the Fed's dovish call has revived the bullish interest in the yellow metal. The analysts noted that “while a cut in the Fed’s outlook for rates and the weaker U.S. dollar no doubt played a part, the continued efforts by Bank of Japan to bolster economic stimulus also helped.”

However, ABN AMRO Group NV commodity strategist Georgette Boele is not very bullish about the prospects of gold. He notes that the bullion might find a resistance ceiling at $1,350 an ounce because the current gains "is a follow on from what happened yesterday with the Fed being more dovish, the market is now going through the upside in gold prices."

Analysts at RBC Capital Markets, LLC think that gold has more downside risk than upside potential ahead. In their words, "Despite gold's jump yesterday, we think it will remain well short of year-to-date highs, and while it will certainly experience continued volatility in line with a number of other macro assets, we remain cautious through year-end."
Published on Oct 4, 2016
By Nikolai Kuznetsov

Copyrighted 2020. Content published with author's permission.

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