How to trade Gold ahead of US Fed's policy move? Check trading strategy

Gold price today: Spot gold was trading with a loss of around 0.45 per cent at $2,570 at the time of the MCX closing. The MCX October gold contract closed at Rs 73,150 (LTP), down 0.49 per cent. 

The metal was down on somewhat better than expected US data released Tuesday. 

Data round-up: Retail sales, industrial production climb in August in the US; 

US retail sales advance (August), an important component of the US GDP, came in at +0.1 per cent m-o-m compared to the forecast of -0.20 per cent as the July data was revised higher from 1 per cent to 1.10 per cent. Retail sales ex auto and ex auto and gas were up 0.10 per cent (forecast 0.10 per cent) and 0.20 per cent (forecast 0.30 per cent), compared to the respective forecasts of 0.20 per cent and 0.30 per cent.

Retail sales ex control group, more precise indicator to gauge consumer spending, matched the forecast of 0.30 per cent, while the July data was revised higher from 0.30 per cent to 0.40 per cent. Industrial production rose 0.90 per cent in August (forecast 0.20 per cent) as NAHB housing market Index (September) came in line with the forecast of 41.

Upcoming data and events: US FOMC monetary policy decision to be announced tonight at 11:30 PM IST is the most crucial decision for the markets as the Central bank is set to begin its easing cycle. Although economists forecast a 25-bps, markets are discounting a 50-bps rate cut possibility also. As reported in Wall Street Journal a few days back, the US Fed members are debating over whether to go for a 25 or 50 bps cut. This uncertainty is somewhat unusual as the Fed always believes in clear, well telegraphed decisions in its communications.

It is to be noted that probability of a 50-bps cut has not been affected by retail sales and industrial production data as it stands around 63%.

Apart from the FOMC monetary policy decision, markets will look at the US housing starts (August), too.

US yields and Dollar: Higher

The US yields were slightly firmer on encouraging set of US data. The ten-year US yields were seen at 3.65 per cent, up around 0.75 per cent on the day, whereas the two-year yields at 3.59 per cent were up over 1 per cent.

The US Dollar Index at 100.99 was up by 0.22 per cent on the day.

ETFs: Inflows at highest level since mid-February

As on September 16, total known gold ETF holdings stood at 83.243MOz, the highest level since mid-February.

Interest in BRICS: A report from TASS has quoted Russian President Vladimir Putin as saying that as many as 34 countries were looking to join BRICs amid de-Dollarization drive. BRICs summit will be held from October 22- October 24 in Kazan, Russia.
 

Outlook: Appropriate risk management is advised to minimise risk from the US Fed's policy decision 

While outlook for gold remains positive on central bank buying, geopolitical concerns, deteriorating fiscal health of the US, elevated global debt to GDP ratio, concerns about Chinese economy, US recession possibility as the job market weakens and falling yields as global economy struggles, the near-term prospects will be depending on the US Fed policy to a large extent. Although economists expect the Fed to start its rate cutting cycle by 25-bps tonight, markets are discounting a possibility of a 50-bps cut. Currently, markets are assigning a probability of around 0.63 to the event of the Fed cutting rates by 50-bps. Such an uncertainty is quite unusual as the Fed does not like to surprise the markets. 

Gold is likely to rise to challenge the resistance around USD2,650 (Rs 75,200) and USD 2,700 (Rs 76,500) should the Fed cut the rates by 50-bps; however, a 25-bps cut can see the metal correcting to USD 2,500 mark (Rs 71,200)in the near-term. Thus, appropriate risk management is needed to minimize the FOMC risk. Near-term support is at Rs 72,600.

(Disclaimer:Praveen Singh is Associate Vice President of Fundamental Currencies and Commodities at Sharekhan by BNP Paribas. Views expressed are his own.)