THIS TIME ITS CHINA V/S U.S.: RSBL

By Mr. Prithviraj Kothari, MD, RSBL

It was China v/s U.S or rather to be precise it was the devaluations of the Yuan v/s the positive economic numbers from U.S.

While one was trying to give the much needed push to gold prices, the other, on the contrary was pulling gold prices down.

Till the middle of the week, gold prices moved upwards and the market was just about to its faith in it. But once the US numbers were out, gold was once again losing its sheen.

Gold got the much needed lift when China roiled global markets by devaluing its currency. Till then gold was travelling on a mostly lower route since mid-June. By the end of the week, however, it appeared the situation was stabilizing, with Chinese authorities on Thursday saying there was no reason for the Yuan to fall further.

In the initial part of the week, Gold prices boosted and the metal regained its safe haven status as news out of China proves to be favorable for gold. The People’s Bank of China surprised markets on Tuesday when it devalued the Yuan against the U.S. dollar for three consecutive days, tumbling the currency by about 3%. 

Gold prices lacked direction on Friday as the People’s Bank of China (PBoC) increased the value of the Yuan while boosting its gold holdings.

The Chinese government released gold holding figures for the second time in recent weeks. The PBoC announced that it bought 19 tonnes of gold last month when prices were at five year lows and Total holdings were at 1,677 tonnes at the end of July, a one percent bump from the previous month.

The gold price continued to slide lower on Thursday afternoon after the dollar strengthened following upbeat US data, and as concerns over China’s economy eased.

Spot gold was last at $1,116/1,116.4 per ounce, down $8.20 on the previous close. Trade has ranged from $1,113.7 to $ 1126.8 so far.

The important numbers coming from the US were as follows-

• PPI month-over-month in July was at 0.2 percent, above the 0.1 percent mark, while Core PPI in July rose 0.3 percent, besting the forecast of 0.1 percent.

• The capacity utilization rate in July was at 78 percent, matching predictions, with industrial production month-over-month in July jumped 0.6 percent, above the consensus of 0.3 percent.

• Preliminary University of Michigan Consumer sentiment in August was 92.9, just off the 93.5 forecast. Preliminary University of Michigan inflation expectations in August were at 2.8 percent, equaling the previous reading.

• The Dow Jones industrial average and S&P were each up 0.3 percent, while the dollar was 0.3 percent stronger at $1.1120 against the euro.

• Core retail sales month-over-month in July was in-line with forecasts at 0.4 percent, while retail sales month-on-month in July matched the consensus at 0.6 percent.

• US weekly unemployment claims were 274,000, near the prediction of 272,000 and the previous reading of 270,000.

The timing of the first rate rise by the Federal Open Market Committee (FOMC) is becoming increasingly important to investors. The FOMC meeting is just over a month away and debate is ongoing whether the Fed should maintain near zero interest rates or raise rates by 25 basis points.

The two main highlights for the coming week are China and the FOMC. While everyone will be on a lookout for any further price-supportive developments out of China or if instead the Federal Open Market Committee says anything to rain on the yellow metal’s parade.

Currently China is proving to be one of the most influential factors for gold prices because the devaluation of their currency sparked interest in gold as a safe haven again and China has reignited the buying in gold.

If the Chinese markets remain more or less stabilized then focus will be shifted on expectations for the FOMC, which holds a policy meeting next month. The Federal funds futures have oscillated lately between factoring in a greater- or smaller-than-50% chance of a tightening in September.

The biggest factor will be Wednesday’s Fed meeting minutes as the minutes are from the July 28-29 meeting, after which there was no news conference.

The picture is expected to get clear on how the Fed is thinking about a potential September rate rise. 

An aggressive sentiment coming out of these minutes will probable pull down gold prices but on the other hand dovish minutes could offer some support

Additionally, traders will keep close tabs on U.S. economic data-

• Monday- The New York Federal Reserve’s Empire State manufacturing

• Tuesday- Housing

• Wednesday- Consumer inflation

• Thursday- jobless claims, the Philadelphia Fed’s business survey and sales of existing homes

 
The focus continues to be on what the Fed is going to do at its September meeting. It’s going to be the fundamental factor across the board as far as commodity markets are concerned, particularly gold.

Apart from this meeting, traders and analysts will also keep a watch on any comments coming out of the European Central Bank, in case policy-makers should hint at increased bond buying known as quantitative easing. Further QE could provide further support to gold prices. 

Given this picture, as of now majority of the market players expect gold prices to fare better in the week to come.

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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