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Gold unlikely to reach $1,400 without certainty on Fed rate-hike delay

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NEW YORK (Scrap Register): Gold could have trouble rallying past $1,400 an ounce as long as the market anticipates more U.S. rate hikes next year, but silver has potential to outperform, said TD Securities.

Thus, the bank favors a short gold/silver ratio trade that would be profitable if silver outperforms. Spot gold on Friday hit a one-year high of $1,357.50 an ounce. Some of this is due to diminished expectations for more Federal Reserve rate hikes this year.

“So long as there is still a chance the U.S. central bank pulls the trigger on the higher Fed funds [rate], along with the risk of three more hikes next year, money managers will have difficulties to justify growing long positions past their current extreme levels, or to erode short exposure any more,” analysts at TDS added.

The rather extreme derivative positions likely means that any additional rallies caused by geopolitics or other temporary shocks are likely to be reversed in fairly short order.

A sustained run into $1,400 an ounce is unlikely to happen until the market eliminates a few hikes from its projections, and this is likely next year's story considering inflation keeps on lagging and the economy and politicians disappoint.

By contrast, underperforming silver is still nowhere near its 2016 highs, TDS points out. There is plenty of room for speculators to become more bullish, while physical demand is likely to improve while mining output does not, the bank says.

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