By Mr. Prithviraj Kothari, MD, RSBL
The gold market is preparing to end its fourth consecutive week in negative territory, as prices dropped to a session low at $1,129.60 an ounce, its lowest level since April 2010.
Gold prices remained under pressure after touching a four month low on Friday, as the dollar tumbled against the euro on signs of renewed optimism that Greece may secure fresh funding from its’ European creditors.
With regard to the Greek financial crisis and at the time of writing, after more than 17 hours of negotiations, Greece reached a deal with its European creditors on Monday, pledging stringent austerity to avoid an exit from the euro.
Let’s have a detailed look at what exactly the agreement states.
This agreement gives Greece a chance to obtain its third international bailout in 5 years. (A compendium of as much as 86 billion euros). Moreover it facilitates easier repayment terms on some of its existing debt of more than €300 billion and a short-term economic stimulus plan
But, it will require Greece to accept a wide array of measures, including pension cuts and tax increases, and effectively subject itself to intensive international oversight in order to qualify for the aid.
While the summit agreement averted a worst-case outcome for Greece, it only established the basis for negotiations on an aid package, which would also include 25 billion euros to recapitalize its weakened financial system.
With Greece running out of money and its banks shut the past two weeks, the summit was billed as its last chance to stay in the euro. Greece has been in financial limbo since the government missed a payment to the International Monetary Fund and allowed its second rescue package to lapse on June 30.
Apart from the Greece crisis, there was a vague picture that was put across by Fed Chair Janet Yellen on the interest rate hike.
On Thursday, she said the U.S. labor market had moved to a more normal state, a reason why the central bank is likely to raise short-term interest rates later this year.
Analysts state that the biggest factor currently influencing gold prices is an expectation of rise in U.S interest rates. Wednesday and Thursday, Federal Reserve Chair Janet Yellen testified before Congress and reiterated that the Federal Open Market Committee feels it would be appropriate to raise interest rates later this year.
“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” stated Federal Reserve Chair Janet Yellen in a speech on Friday to the City Club of Cleveland. She recommended that an interest rate hike may come before the end of the year. She further said “I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”
By the first quarter of 2015, there was a string belief in the market that a rate hike would be happen in June, given the positive economic reports from U.S. However, the general consensus seems to be that the Fed will delay any rate hikes until January 2016, though many doubt it will take that long.
Although most economists had expected that the US central bank would raise interest rates as early as June and then September, an increasing number of analysts and traders doubt any rate hikes will happen until January 2016.
What came as a surprise or I should say rather say a “shock” to the bullion market was the disclosure by China of an increase in its official gold holdings for the first time in 6 years.
China last reported a figure of 1,054 tonnes in April 2009, and now says it sits at 1,658 tonnes today – an increase of 57%. The central bank’s gold holdings make it the fifth biggest gold reserve in the world, surpassing Russia.
Gold prices didn’t move up on the news rather the metal sold off, hitting a fresh 5-year low during the session.
After a broad- based commodity sell-off on Tuesday, which saw the price of gold fall more than 2% hitting a four month low of $1,145 an ounce, the price of the yellow metal ended up on the week to settle at $1162.80 per ounce.
The sell-off last Tuesday was precipitated by the collapse of Chinese equities. AndA, since China is the world’s biggest importer of raw commodities, weaker growth expectations is spooking the markets and there seems to be spillover effect into precious metals.
Once again, investors remain perplexed about the price action of gold, especially after Greece defaulted on its debt owed to the International Monetary Fund and imposed bank closures and capital controls amid its debt crisis.
But, it is unlikely that the price of the yellow metal will remain suppressed for too long as global demand for gold remains strong despite the recent price dip in US dollar terms.
The primary purpose of this blog by Prithviraj Kothari - MD, RSBL, is to educate the masses of the current happenings in the Bullion world.”
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