Gold Fundamental Forecast – November 2, 2016

Gold futures surged on Tuesday, driven higher by a weaker U.S. Dollar and steep losses in the U.S. equity markets. December Comex Gold futures finished at $1288.00, up $14.90 or +1.17%.

The U.S. Dollar was under pressure early after the Reserve Bank of Australia voted to leave interest rates unchanged at 1.50% while issuing a monetary policy statement that suggested the central bank was adopting a neutral stance when it comes to future interest rate cuts.

Traders didn’t even respond to positive economic data that should’ve underpinned the dollar. The Markit manufacturing PMI came in at 53.4, above September’s 51.5 read. The ISM manufacturing index for October came out in line with expectations at 51.9. Construction spending for September came in well below expectations at -0.4%.

The catalyst behind the weakness in the dollar and U.S. stocks was concerns over the outcome of the U.S. election. Investors have been particularly nervous since last Friday when the FBI announced it was renewing its investigation into Democratic presidential candidate Hillary Clinton’s emails.

Traders were also hedging their positions ahead of Wednesday’s Fed meeting. Although the central bank is widely expected to leave rates unchanged, traders will be paying particular attention to its monetary policy statement that is expected to lay out the guidelines for a December rate hike. However, it may make a comment about volatility surrounding the election that could cause some volatility.

Forecast

We’re expecting gold to remain underpinned early in the session on Wednesday. Unless there is dramatic news regarding the election, gains are likely to be limited ahead of the Fed statement at 1800 GMT.

With a possible Trump victory back in the news, speculative investors and defensive investors are taking long positions in gold because of the uncertainty over Trump’s U.S. economic and foreign policy.

Gold could also be supported by early weakness in the U.S. equity markets as investors become more adverse to risk.

Going into the Fed announcement, the markets have priced in around a 78 percent chance the Fed will raise rates in December, and around a 6 percent chance they will raise rates on Wednesday.

The Fed is likely to say it is considering a hike at its “next meeting,” given the right circumstances like an improving labor market. At this time, the Fed may have to address worries about the uncertainty over the election and the possible return of volatility.

The Fed knows what happened with Brexit and how it affected the financial markets. So it may mention it will remain cautious pending the outcome of the election. I don’t think that investors will like this comment so it could help fuel another rally by gold.

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