DENOMINATING DOLLAR

by Mr. Prithviraj Kothari, MD, RSBL

Over the fortnight gold has witnessed a severe decline in prices. The first week kicked off with a plunge in gold prices and the same continued this week too. Historically September month has been the best performing month for gold, however this year it kicked off on a negative role as we saw that gold prices have declined by 3%. On Friday, a low of $1225.90 was set when lower than expected Chinese industrial production for the month of August was released. A strengthening US dollar and the expected change to the FOMC's policy have played an important role in this decline in gold prices. Gold has been destabilized by the lethal combination of a stronger US dollar and a supple equities. Adding to it is the lack of inflation in the major economies. 

Let's have a look at major factors which could continue to play negative on gold:

Euro tumbled to multi year lows last week after ECB slashed interest rate by 0.1% across the board as inflation and growth remained a concern.

The surging US dollar has been acting as a bearish factor for the precious metals. The dollar index was at a 14 month high on Friday and was steadily on track to post its ninth consecutive week of gains. A strong US data and a fall in Euro has strengthened the dollar even further and raised expectations that the US Federal Reserve would soon raise interest rates.

On the geopolitics front, U.S. President Obama said Wednesday evening that the U.S. military will use more air strikes against the ISIS terrorists, but will put no troops on the ground in the Middle East. That news was not unexpected and had little markets impact. The Russia- Ukraine cease fire was holding up and the Ukrainian President on Wednesday quoted that most Russian troops have pulled away from the Russia- Ukraine border. 

With geopolitical concerns seems to be easing out, there seems to be little support for gold.

Moreover, Investment demand in Gold has been showing no improvement.  Weak investor sentiment was reflected in the SPDR Gold trust that saw holdings drop 0.32 tonnes to 788.40 tonnes on Friday. Hedge funds and money managers cut bullish futures and option bets in Gold to their lowest in nearly three months, the Commodity Futures Commission said on Friday.

The demand for gold globally has not picked that well this year. Asian countries aren't witnessing the same patterns of buying when the rate was the same in the previous years. Moreover in the past, such price falls would have attracted bargain hunters. Not now.

The 11-year rally in gold prices created a perception that they will only go up. This price fall has broken that conviction, Now people are diversifying their Investments. This trend will increase in the coming years but expectations of a tightening in super-loose U.S. monetary policy would weigh on gold.

Although, gold prices have been declining since last year, the metal does remain an attractive investment in China. Demand for gold in China will grow steadily as the middle class expands and the Yuan is further internationalized which will require an increase in gold reserves.

Looking ahead, the near term outlook for Gold and silver looks towards downside in international dollar terms. This is the direct impact of improving US economy and looming interest rate rises which will continue to discourage investor buying and in fact lead to selling. I do feel that slowly and steadily the rates will be hiked depending on the economy's growth. This will provide the breather for both the metals.


Traders and investors are already looking ahead to next week, and a more robust batch of economic data points, highlighted by the meeting of the U.S. Federal Reserve’s Open Market Committee (FOMC). Its one of the most important meeting where it would debate on  potential overhaul of its guidance on interest rates and would decide on how QE3 can be exited. Next week is also the much-anticipated referendum on Scotland’s independence from the U.K

TRADE RANGE:

METAL	INTERNATIONAL price	DOMESTIC price
GOLD	$1202 - $1252.70  an ounce	Rs.26,200 - Rs.27,500  per 10 gm
SILVER	$18.20 - $19.70  an ounce	Rs.39,500- Rs.43,500  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 - "A Booster Month For Gold"

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