Chances of interest rate hike in near future fade

Initially gold began on a negative note. Gold witnessed a decline in prices till mid-week.
However by the end of the week gold prices picked momentum and closed on a positive note.
GOLD BULLION headed for a second weekly gain versus the falling Dollar Friday morning in London, trading at $1247 per ounce as the US currency held at its weakest in 14 months against the Euro.

The greenback faced a fresh barrage of assaults on the currency markets. June retail sales figures and inflation levels disappointed, and this led to a selloff of USD. Headline inflation plunged more than forecast, and retail sales reversed course.  Hence, sentiment towards the USD declined
Gold and the rest of the precious metals were up by an average of 0.3% during trading hours on Friday July 21, with spot gold prices at $1,246.44 per oz, a weaker dollar and continued choppy political waters in Washington providing support.

By Monday, 17 July, the greenback was trading near 10-month lows. Further, news reports of improved economic performance in China sent investors scampering away from the USD towards other assets. Safe-haven assets such as gold, silver, platinum, and the JPY and emerging market currencies gained favour as the USD retreated.

Gold’s rebound found new drive on the combination of the weaker dollar, which we think stems from the weak political scene in Washington and from the less hawkish US Federal Reserve stance.

A weakening dollar along with hawkish Fed comments strengthens gold prices as gold is generally preferred as a mode of investment in times of uncertainty and global turmoil.

It is clear that the US economy is not performing as expected. This naturally dampens expectations and results in weakness for the USD. When traders get antsy, they rush towards safe-haven assets such as gold bullion, and this is precisely what we are seeing now.”

The dollar index continued to fall, at 94.00 it has set a fresh low, these levels were last seen in June 2016. A negative impact on the USD is good for gold. Since bullion is a dollar-denominated asset, demand moves in the opposite direction to the strength of the USD. With weakening sentiment about the USD, foreign buyers of gold purchase more per unit of their currency. Plus, the perceived weakness of the USD drives traders to gold bullion.

With softness in inflation figures, members of the Federal Open Market Committee (FOMC) are reluctant to move forward with additional interest rate hikes. It is more likely that the Fed will opt for an unwinding of its $4.5 trillion balance sheet than more rate hikes this year.

If data continues to be negative and if the third-longest [economic growth] cycle in US history cannot produce a cyclical uplift in wages and prices then gold prices are expected to rise tremendously as any large disappointment in the [global economic] growth story will lead to an increase in gold prices.

The appeal of gold as an insurance asset is greater today than it was at the beginning of the year. It suggests to us that gold continues to be viewed as a [portfolio] diversifies and this should help keep the market supported overall.

The latest economic data releases once again bring the prospect of a Fed rate hike into question. According to the CME Group Fed Watch Tool, there is a 3.1% probability of an interest rate hike on Wednesday, July 26, 2017. For September 20, 2017, the probability of a rate hike is just 8.2%, and for November 1, 2017 the probability of a rate hike is just 11.6%. These economic forecasts are good for gold. Every time the Fed pushes back the prospect of a rate hike, currency traders take a bearish perspective on the greenback which further drives the demand for gold.

Gold Dips expected to remain Supported

Gold and other metals had a firm start for the week which continued over Tuesday. Gold and the other precious metals were firmer on Tuesday morning, with prices up an average of 0.4% while gold prices were up 0.3% at $1,237.35 per oz. This was seen as an after effect of a strong performance on Monday when the complex closed up an average of 0.8%.

Gold was more or less stable on Wednesday as it opened at 1241.75/1242.75 per ounce. Post which it rose to a high of 1243.50/1244.50 before retreating to a low of 1239.00/1240.00 as the dollar pared early losses and the euro fell back from yesterday’s 14-month high.

Gold prices are gaining from the weak dollar prices and lower bond yields which help in reducing the opportunity cost of holding gold thus pushing its prices higher.  Prices have firmed up in recent days, this despite geopolitical concerns being light but the weaker dollar and a less hawkish US Federal Reserve seem to be underpinning price rises.

But at the same time, buoyant equities are also a headwind for gold and the lull in geopolitical tensions is not getting any good for gold. So the expectations of a steep rise in gold prices aren’t strong currently.

All in all, we are not expecting much from the precious metals camp in the short term, but we expect dips to remain supported.

Dovish Fed Comments positive for Gold

It’s quite strange that 10 days back the key influential factor that pulled gold prices down was responsible for the rise in gold prices in the past 5 days. Yes rate hike!!!!.

The precious jobs reports brought mixed sentiments for gold traders as there wasn’t really anything in this number which was going to put the brakes or fasten an interest rate hike.

But what played positive for gold was the statement realized by Fed Chairman, Janet Yellen post the data released on Friday.

The surge in gold prices came after a Friday report on consumer prices showed that inflation in June came in flat, a sign that consumer prices had trouble sustaining its upward momentum. A weaker-than-expected reading for June’s retail sales, which fell 0.2%, also signal led weakness. Economists polled by Market Watch had forecast a 0.1% increase. Market participants said the lack of spending from U.S. shoppers made it difficult to envision inflation approaching the Fed’s 2% target.

Gold prices on Friday marked the highest finish of the month and their first weekly rise since early June, as data on retail sales and inflation stoked concerns that the pace of economic growth may not merit lifting U.S. interest rates again in 2017.

U.S. consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and soft domestic demand that diminished prospects of a third interest rate increase from the Federal Reserve this year.

The U.S. data bolstered expectations that the U.S. Federal Reserve would likely to move slowly to continue raising interest rates in the absence of inflation signs. Some had been expecting another rate hike in 2017, however Fed Chair Janet Yellen's comments to the U.S. Congress this week was more dovish than originally anticipated.

Activity was muted ahead of a speech by US Federal Reserve Chair Janet Yellen later in the day which could give clues on the Fed's attitude towards inflation, and on when the US central bank will start reducing its $4.5-trillion balance sheet. That would likely push up bond yields, boosting the opportunity cost of holding bullion, and pushing gold lower.

But, in a testimony to the Congress, Federal Reserve Chairman Janet Yellen had signal led a gradual approach to future rate hikes, which pushed down the dollar and boosted the appeal of the precious metal.

The disappointing U.S. retail sales and inflation data has now seen the odds of another rate hike fall below 50% this year which  has further boosted the appeal of low- and non interest-bearing assets on a relative basis, hence the  market witnessed  breakdown in [the U.S. dollar/Japanese yen] and breakout in gold.

The latest economic data may be viewed as providing insufficient support for the Fed to lift interest rates at least once more in 2017 and shrink its $4.5 trillion balance sheet—an act that can also serve to lift rates and tighten economic conditions.

The next big thing for traders is the upcoming ECB monetary policy  meeting to be held on July 20 in Frankfurt and that certainly has an ability to bring another episode of taper tantrum. 

Gold likely to be embraced as a Safe Haven

Gold prices have been steadily on decline since early June when the metal traded just shy of $1,300 an ounce.

This week too gold ended on a negative note even though the week began with a different picture.
Gold prices were lying stable at $1,225.24 per oz on Wednesday morning after a prices rise on Tuesday, closing up 0.2%.

However on Friday, gold dipped $5.60 to $1219.10 in Asia before it bounced back to $1227.00 just after morning’s jobs data was released, but it then fell to a new session low of $1207.30 in late morning New York trade and ended with a loss of 1%.  

Spot gold was down 0.7 percent to $1,215.81 per ounce by 1336 GMT, after touching an intraday low of $1,214.40, the weakest since May 9. It has dropped about 2 percent this week and is set for its biggest weekly fall since the week of May 5.

Gold hit a two-month low on Friday after stronger than expected United States jobs data increased the likelihood of another U.S. interest rate increase.

U.S. hiring picked up in June while wage gains disappointed yet again, a mix that may continue to be a puzzle for the economy and policy makers, Labor Department figures showed Friday.

While payroll gains were broad-based and boosted by the biggest jump in government jobs in almost a year, wages were below forecasts, even with the jobless rate close to the lowest since 2001.

It is quite evident from the unrelenatble hiring in June that thelabout market is resiliebt and may lead to a stronger acceleration in wages. At the same time, the month’s data could also reflect a new graduating class and the summer’s seasonal workers joining the labor force -- some likely welcomed by employers who are struggling to find workers.

The data suggested that the job market is attracting people off the sidelines, as the size of the labor force and number of unemployed people increased, indicating more people are actively looking for work. The number of people who went from out of the labor force to employed rose to 4.7 million, the highest in data going back to 1990.

While wage growth is running below the peak of previous expansions, the figures may be depressed by weak.

U.S. non-farm payrolls jumped by 222,000 jobs last month, the Labor Department said on Friday, beating expectations of a 179,000 gain.          

The data brought negative news for gold traders as there isn’t really anything in this number which is going to put the brakes on an interest rate hike.

Nevertheless, the report marks a relatively strong finish for the labor market in the second quarter that should support continued gains in consumer spending in the coming months. Federal Reserve policy makers raised interest rates last month and reiterated plans to start reducing their balance sheet and increase borrowing costs once more this year.

Recent selling has placed enormous pressure as prices broke through critical support levels.  Much of that selling was a result of a shift in market sentiment as the Federal Reserve and the European Central Bank relaxed their respective multiyear quantitative easing programs.

However, markets remain constructive for gold.The bigger picture for gold is encouraging. Despite the U.S. tightening cycle and VIX bear market, gold has recovered. It appears to be looking ahead to a beneficial endgame.

Gold certainly has a way of getting investors’ hopes up. Most recently, it neared $1,300 per ounce in early June, prompting optimism among bulls about a meaningful breakout to come. Alas, gold prices failed to push through that level, and now sit around the $1,250 mark. There are, of course, bullish and bearish arguments to be made but, on balance, gold is currently facing serious headwinds. That’s not to say, however, that there isn’t a long-term bullish case for gold. There is, but it may take years to play out. Simply put, the world is awash in too much debt, be it household, corporate or government.

According to an October 2016 report by the International Monetary Fund, gross global debt (excluding that of the financial sector) stood at $152 trillion, representing an all-time high 225% of world GDP. This overhang risks prolonged economic stagnation, if not a worse outcome. At some point, central banks will be forced to engineer higher inflation rates to lessen the burden of all this debt. Realizing this, investors can be expected to embrace gold as the ultimate safe haven.