Spot gold continues to consolidate with price activity centered on the $1200 level and within Friday’s range. With the Fed’s two-day FOMC meeting beginning today, sideways trade is likely to prevail at least until tomorrow’s policy announcement.

The Fed is widely expected to hike interest rates by another 25 bps. Focus will be on the guidance, economic projections and Powell’s presser as markets are keen to get a clearer picture of the likely policy path heading into 2019.

The probability of a rate hike tomorrow is at 94.4% according to the CME’s FedWatch tool, all-but a sure thing. Markets have had this priced in for some time. The probability of another hike in December is currently 72.3%. However, looking out to March 2019, the prospects of a hike are presently 41.2%.

The latter is where the market is seeking some clarity. Whether they’ll get it or not remains to be seen, but Powell has arguably been a little more forthright than his predecessors.

A hawkish tone may revive the underlying uptrend in the dollar, which would likely weigh on gold. Generally strong U.S. economic data should reflect in solid economic projections, which would arguably warrant the Fed maintaining the current policy tact into Q1-19.

Today’s surge in September consumer confidence to an 18-year high of 138.4, is just the latest indicator of economic strength. In an economy driven by consumption, a confident consumer is a key element. On the other hand, a print like that could be an indication of frothiness.

While safe-haven interest in the dollar seems to have eroded somewhat in recent weeks, simmering trade tensions are still seen as offering support to the greenback. The dollar index still needs to take out support at 93.71 (09-Jul low) to clear the way for a challenge of the next tier of support at 93.21/19 (Jun lows).

Such a move in the dollar would at least get gold to retest the high end of the range at 1212.66/1214.32. Penetration of this barrier is needed to ease short-term pressure on the downside and confirm a breach of the 50-day moving average. Such a move would shift attention to the 100-day MA (1242.47 today).

On the downside, Friday’s low at 1191.85 protects the more important low from 11-Sep at 1187.77. The latter corresponds closely with the 50% retracement level of the recent corrective/consolidative phase at 1187.29.

Silver has jumped about 1.5% today to trade at new 2-week highs. Given how short the market has been, this may be some position squaring ahead of the Fed decision in light of the markets inability to challenge below $14 over the past week-plus.

With gold still well contained, the gold/silver ratio has moved meaningfully off the recent multi-decade highs. It’s way too early to suggest the ratio is topping, but silver is overdue to play some catch-up, particularly with the PGMs.

Today’s move in silver constitutes a convincing breach of the 20-day moving average (14.30 today). The 50-day MA (14.83 today) is the next level to watch, although another 30¢ of upside ahead of the Fed seems unlikely. The dollar would likely need to extend its recent losses in order for silver to see a more serious challenge of the upside.

Platinum set a 6-week high at 839.19 on Friday and price action since then has been consolidative. Downticks have been limited, suggesting there is probably still some additional upside toward the 100-day MA (843.53 today). This level corresponds with a series of highs from July/August that reach as high as 844.13/845.10.

Palladium has set an 8-month high at 1068.71 today. Recent strength has returned considerable credence to the dominant uptrend. The next resistance I’m watching is 1074.32 (78.6% retracement of the decline from 1139.62 to 832.15). Above that, scope is for a retest of the 1139.62 peak.

It's been a wild ride in the PGMs of late. Palladium is up more than 28% since the mid-August low at 832.15. Platinum by comparison has gained just over 11%. It's very much a story of supply and demand.

The palladium market remains in a supply deficit, while platinum is in oversupply. Both are byproducts of nickel and copper mining, so the PMGs will continue to be pulled out of the ground regardless of their respective supply/demand dynamics.

With the majority of PGM supply coming from Russia, the potential of further economic sanction is an overhanging threat to supply. South Africa is another major supplier, where labor issues at mines are a persistent worry. Additionally, the recent land redistribution movement has sparked some worries about sanctions against South Africa.

On the demand side: Palladium continues to experience robust demand from the automobile industry, driven largely by China and India. Platinum is more commonly used as a catalyst in diesel engines and demand for diesel cars has plummeted in recent years as a result of the Volkswagen emissions scandal and a tougher regulatory/tax environment in Europe and the UK.

It seems logical — as our futures’ team suggested last week — that China would be bidding up the PGMs in an effort to secure needed supplies before any additional tariffs impinge on their ability to do so.

I do see additional upside potential in both platinum and palladium, although platinum will continue to lag. Strength in the PGMs (and energy) are likely attracting flows back into commodity funds and ETFs, helping to underpin gold and silver in the process.


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