UNCERTAINTY OVER INTEREST RATE HIKE !!!

by Mr. Prithviraj Kothari, MD, RSBL

From December 2008, to September 2011, Bullion futures more than doubled to a life time high of $1,923.70 an ounce. Gold prices sky rocketed as the Fed purchased debt and cut rates to an all-time low to spur economic growth. 

This year, gold bounced once again after its downfall in 2013. 

The metal rose 6.1 percent this year , partly as unrest in Ukraine and the Middle East increased haven demand.

This week investors eagerly waited for the minutes of the FOMC meeting that were to be released n Wednesday and the Jackson Hole Economic Symposium on Thursday and Friday that was expected to bring in some volatility in the market.  Apart from this many economic reports were slated to release-

• CPI
• Housing figures 
• Philly fed index from the U.S
• BOE rate decision and CPI from Great Britain
• Japan’s trade balance
• China's manufacturing PMI
• Retail sales and CPI from Canada.

Let's have a look at the data released from these reports

• U.S. home resale's raced to a 10-month high in July 
• Six straight months of payroll growth over 200,000 jobs per month — the first time that’s happened since before the Great Recession in 2007!  
• There were signs of a strengthening economy as the  number of Americans filing new claims for jobless benefits fell last week
• On Thursday, data released showed that the Business growth in China and across Europe slowed this month
• But U.S. activity picked up speed, leaving a mixed picture of global economic growth.  

This week , gold was mainly hovering around the interest rate news. The entire investment market- be it stock, bond, currency or commodities, is presently pre occupied with the only one question- When will the first interest rate increase happen? 

A positive economic growth from the US economy and an expectation for an early rate hike is expected to pull prices down.

Many researchers are expecting that the forecasting the U.S. central bank to raise rates in mid-2015 but some economists believe that it may happen much earlier.

A slowing world economy on one hand and a strengthening US economy on the other, is giving mixed reactions from the market. Uncertainty prevails and investor anxiety is on the rise. This means there will be higher movement for gold and silver.

It all depends on whether each new piece of economic data is inflationary or deflationary in nature

Though the market has been linked to rising interest rates, some say that it won't have a less negative impact on gold moving forward.

In fact now all eyes are headed towards inflation - a major driver for gold prices.

There is still some uncertainty over inflation because of the unprecedented steps the Fed has taken. Inflation along with rising interest rates will have an impact on gold. 

There are various key influential factors that will provide good support to gold -

• Rising interest rates could halt the free-flow of capital into the record-breaking equity markets and compel investors to take a more self-protective position. 
• A decline in supply  from mining and recycling sector on one hand and rising demand on the other will  raise a spark in gold prices. Also supportive for the gold market is an expected decline in supply, both from mining and recycling.

On Thursday, gold posted its steepest decline in over a month as investors left the market ahead of Friday's speech by Federal Reserve Chairwoman Janet Yellen . Gold fell to a two month low this week after the minutes of the Feds last meeting were released and it showed signs that policy makers may raise interest rates earliest than expected.  But Fed Chairman Janet Yellen also stated in a conference in Jackson Hole, Wyoming that “underutilization of labour resources still remains significant.

The debate now is about "when" to raise the interest rates. Any hike in these rates would diminish the sentiment to own gold. Gold produces no income and struggles to compete with interest-bearing investments such as Treasury bonds and bank deposits, whose yields will rise once market interest rates turn up. At the same time, signs that crisis in Ukraine and the Middle East are having a limited impact on global growth also have reduced demand for gold as a haven.

The Pentagon on Friday condemned the movement of a Russian convoy into eastern Ukraine, calling it a violation of Ukraine's sovereignty and demanding that it be withdrawn and failure of which would result in additional costs and isolation.

The world economy  is being pulled by the tug-of-war being held between the forces of inflation and deflation

In any case, all eyes are headed towards the FOMC meeting in September, which will also have a press conference and could be the one, in which FOMC chairman Yellen offers some more information regarding the next rate hike. The current estimates range mostly between the end of the first quarter of 2015 and the end of the second quarter.

TRADE RANGE-

METAL	INTERNATIONAL	DOMESTIC
GOLD	$1264- $1297 an ounce	Rs. 27,800- Rs. 28,500 per 10 gram
SILVER	$19.00- $19.75 an ounce	Rs. 41,500- Rs. 43,000 per kg

The primary purpose of this article by Mr. Prithviraj Kothari is to educate the masses of the current happenings in the Bullion world.

- Previous blog -

"The Sentiments Are Bearish For Gold"

http://www.riddisiddhibullionsltd.blogspot.in/2014/08/the-sentiments-are-bearish-for-gold.html