DOLLAR DRAWING DIRECTIONS FOR GOLD

by Mr. Prithviraj Kothari, MD, RSBL

                                                     

During the financial crisis in September 2008, gold price rose $50 in a single trading day on 18th September. Investors adapted gold as they perceived this asset to be a safe haven in terms of liquidity and security.  This day was marked in history as it was after February 1980 that gold had made such a huge jump in one single day. in 1979 and 1980, the world witnessed global uncertainty. At that time the key influencers for gold were the Russian invasion of Afghanistan and the Iranian hostage crisis. Most of these factors were geopolitical. 

Even today gold has been hovering around the geo political uncertainties. In fact during 1980 it as just geo political tension but today its lots more. Terrorism along with financial uncertainties have had a great impact on gold prices.

The key driver of the gold price at the moment is perceived to be the relative strength of the US dollar, yet the US dollar is only stronger compared to the other main currencies because these currencies, such as the Euro, are weak due to their economies remaining weak and their money supplies having been debased.

Gold is falling on concerns over strengthening US economy and the stronger dollar. Dollar gained ahead of the data to be released next week which includes the monthly employment numbers that the Fed will be watching. Currently it appears that while the rest of the world is in the doldrums, The US economy is performing comparatively well. The Dollar index hit a high of 85.68 and closed at 85.64 for the week on strong economic data from the US.

U.S. economy has grown in fastest pace in 2 and a half years in the second quarter. The Commerce department raised its estimate of growth in gross domestic product to a 4.6% annual rate from the 4.2% pace reported last month.

During the week, gold traded near the lowest level in almost nine months as the dollar rose to a four-year high amid prospects of higher borrowing costs as the U.S economy improves. 

Though September is considered as one the best performing months for gold, this year the yellow metal has declined 5.3 percent in this month itself. After dropping to $1207.04 on September 25, it has touched the lowest level since 2nd January. 

Gold prices continued their downhill ride to touch a low of $1,207/ounce last week. However, they bounced from that point and closed the week at $1,218/ounce, up from $1,215.7/ounce in the previous week. The fear of gold  miners cutting down on production if prices plunge below $1,200 is holding prices. The cost of production of major gold miners is about $1,350/ounce now, according to estimates of analysts.

Despite the news of US-led strikes against militants in Syria, gold prices didn't move up much as expected as metal continues to loose its safe haven appeal to investors. The US SPDR Gold Trust, the largest gold-backed exchange-traded fund, saw its holdings are at 772.25 tonnes on Friday - the lowest since December 2008.

Gold is also heading towards its first quarterly loss this year as strong data coming from US has made the metal weak. Data last week showed the world’s largest economy grew the most since 2011 in the second quarter. Consumer spending accounts for about 70 percent of gross domestic product. In the US, data showed that sale of new homes surged in August and hit its highest level in more than six years. Also, the final estimate of the second quarter (April-June) GDP that was released on Friday showed that the US economy expanded by 4.6 per cent.

Hence I still feel that The dollar remains the driver of gold direction.

Though geopolitical worries may not give that push or support to gold prices, there are chances that gold may witnessed recovery and not fall significantly from current levels. 

with the mining costs of most gold producers at $1,330-1,350/ounce, they can shut mines and stop new explorations. In such a case, supply will fall and curtail prices from slipping lower.

Moreover, if the dollar continues to rally, there may soon come a point when it will turn a concern for exporters in the country.

Demand has always been a supportive factor for Gold prices and it shall continue to do so in the near future:

World's largest bullion consumer- China- has been importing more gold in September than in the previous month due to demand from retailers who are stocking up gold for the upcoming National Day Holiday. From 1st October, Chinese markets will closed for a week and during this period retail sales are expected to rise. Data on Thursday showed that China's net gold imports from Hong Kong rose in August from a three year low in July. Moreover, imports are expected to remain high due to seasonal demand

Apart from this , one interesting trend that we witnessed was the rising demand for gold from India. After nearly 5 months, we saw some positive news coming from the bullion markets in India as buyers appear to be taking advantage of the relatively low gold prices. Gold demand has picked up across the country, according to traders, despite it being the `shradh' period, which many in India consider inauspicious for buying not just gold, but even other commodities such as cars, there has been some buying reported across retail outlets. As we all know that active market players usually buy at dips. But this time apart from the market player we also saw retail demand for gold rising. 

Russia added to its Gold holdings for a fifth month in a row in August, while Kazakhstan raised its holdings by nearly 800,000 ounces, data from the International Monetary Fund showed on Thursday.

Summing it up, I would like to say that the Middle East is a powder keg that seems likely to explode. The U.S. and western nations have taken a hard stance against an increasingly powerful Russia. This is effecting an already fragile Euro zone and other economies.

Gold has protected wealth throughout history from financial crises and war. We believe it will continue to do so in the coming years.

TRADE RANGE:

METAL	INTERNATIONAL price	DOMESTIC price
GOLD	$1206- $1237 an ounce	Rs.26,000-Rs.27,500 per 10 gm
SILVER	$17.15- $18.00 an ounce	Rs. 38,500 - Rs. 40,000 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.

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"Investors losing interest in gold over interest rate rise"

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