Gold Investors Up the Ante Before Critical Fed Decision on Rates

(Bloomberg) -- Gold investors are positioning for further gains in the lead up to the U.S. Federal Reserve's first expected cut to interest rates in more than a decade.

Holdings in exchange-traded funds backed by bullion extended gains to the highest since April 2013, according to data compiled by Bloomberg. In silver, the combined volume of calls and puts has surged above 225,000 contracts this month, on course for the highest since November 2010 in a sign of greater speculative interest.

Gold may be poised for a breakout year, with prices posting a third monthly gain, as investors anticipate rate cuts from the Fed as growth slows and trade-war frictions bite. Bullion has also drawn investor interest as other risks mount, with tensions rising in Europe over Brexit, and in the Persian Gulf between Iran and western nations. Adding to signals of an economic slowdown, data from China Wednesday showed manufacturing shrank again in July.

“Gold will look for direction in the tone of the Fed chief's rhetoric,” Alfonso Esparza, senior market analyst at Oanda Corp., said in a note.

More-dovish statements “could lead to a weaker dollar and a higher price for gold, but neutral-to-hawkish comments on the economy could lead to a rebound in the dollar, putting downward pressure on the metal,” he said.

President Donald Trump stepped up his attacks on the Fed on Tuesday, demanding a “large cut” in rates to support the economy. He also hit out at China for what he said is its unwillingness to buy American farm products as the two nations resumed trade talks.

Markets are “cautiously optimistic on precious metals,” Bob Haberkorn, senior market strategist at RJO Futures in Chicago, said by phone Wednesday.

“There are a lot bulls that have made a lot of money that are nervous this morning about ‘should I take money off the table ahead of this announcement?'” Haberkorn said. “Because this is what the whole buy-up was -- the whole buy-up was anticipating a quarter-point today.”

While prices could fall following the announcement depending on the Fed's language, any dip “will probably be bought up fairly quickly,” Haberkorn added. To reaffirm a larger upside move, he expects prices will need to close above $1,440 an ounce.

Gold for December delivery slipped 0.3% to settle at $1,437.80 an ounce at 1:30 p.m. on the Comex in New York. Silver fell 0.9% to $16.405.

In other precious metals, platinum futures gained 0.7% on Wednesday, while palladium rose 1%.

To contact the reporters on this story: Ranjeetha Pakiam in Singapore at rpakiam@bloomberg.net;Rupert Rowling in London at rrowling@bloomberg.net;Justina Vasquez in New York at jvasquez57@bloomberg.net

To contact the editors responsible for this story: Phoebe Sedgman at psedgman2@bloomberg.net, Steven Frank, Joe Richter

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