XAU/USD: beware of sharp drop in gold if Fed becomes less dovish than expected (ABN AMRO)

In a note published 2 days ago, ABN AMRO analysts believe that an aggressive easing of monetary policy by the Fed has weighed on the US dollar in a risky environment. In addition, the decline of the greenback and the eventual decline in rates has strengthened gold prices.

"Our year-end 2019 target of $1400 per ounce has been exceeded and prices are now at $1430 per ounce.

In the short term, the possibility of a 50-basis point cut in interest rates by the Fed next month will continue to support gold prices. In addition, price dynamics are strongly positive, as are the technical prospects for the price of gold. The Central Banks' dovish tone should probably last, which provides major support.

Gold does not pay interest, so if interest rates decline in other countries (such as the United States), it will increase the relative attractiveness of gold as an investment asset. However, our economists expect the Fed to reduce rates by only 25 basis points at next month's meeting.

If the Fed's tone sounds less dovish or if the Fed does not announce a 50-basis point drop, the price of gold could fall considerably, as speculators hold extremely long positions in this precious metal.

Even though the Dollar Index trend turned negative after breaking below the 200-day moving average, we do not expect a generalised weakness of the greenback. A deterioration in investor confidence will favour the dollar versus gold.

We are maintaining our year-end 2019 forecast of gold at $1,400/ounce, suggesting that the gold price is currently higher than expected."