Tensions Push while Dollar Pulls Gold Prices

Gold prices have been correcting recent gains, the pullback tested the break-up level at $1,295 per oz and it gave way, which is a sign of weakness. Stints of haven buying have since given prices some lift, but the gains have not been held on to, which suggests a market that is getting tired of the on-going pomposity but lack of progress over North Korea. In addition, the stronger dollar is proving to be a negative for gold prices.

The week began on a positive note for gold as spot gold prices inched higher during Asian morning trading hours on Tuesday September 26 as investors opted for haven assets amid heightened geopolitical tensions.

North Korean accusations and the Kurdish independence referendum threatening to add even more instability to the Middle East saw investors heading for the gold safe haven trade, shrugging off a stronger US dollar in general overnight thus increasing the demand for the yellow metal.

Concerns also arose on straining relations between the USA and Iran after the latter claimed it successfully launched a missile and over oil supply disruptions after Turkey threatened to close the route for Kurdish shipments in retaliation for holding their independence vote.

However on Wednesday the markets witnessed a u turn as gold prices were pulled down over a strengthening US dollar.

The US dollar strengthened on Wednesday following hawkish comments from US Federal Open Market Committee chairwoman Janet Yellen on Tuesday.

The spot gold price remained below $1,300 per oz during Asian morning trading on Wednesday September 27 and was quoted at $1,295.00-1,295.30 per oz as of 04:33 BST, up just $0.95 on the previous session’s close.

Yellen’s speech was interpreted by markets as hawkish as she noted that it would be “imprudent” to keep monetary policy on hold until inflation reaches 2%, thus lending weight to the possibility of a December US rate increase.

Stronger dollar pulls down gold prices

But the metal still recorded its second consecutive weekly decline after the Federal Reserve on Wednesday reiterated that it expects to deliver another rise in interest rates by the end of the year.

Prices for the yellow metal dropped about 1.7 percentlast week, posting their second consecutive weekly decline.

Gold futures witnessed nominal gains, with heightened tension pegged to North Korea credited with providing a modicum of support to the haven.

Late Thursday, North Korean officials threatened to test a hydrogen bomb over the Pacific Ocean, escalating tensions in the Korean Peninsula. North Korea’s leader Kim Jong Un criticized President Donald Trump for remarks made during the U.S. leaders U.N. speech Tuesday, in which he threatened to “totally destroy” Pyongyang if provoked.

Gold prices would have crashed to $1,265.60 if North Korean risk didn’t resurface and would have taken prices back to levels last seen more than a month ago.

But the Fed, which indicated Wednesday that it still plans to raise rates once more by the end of the year, was the reason why gold prices fell.

The central bank also announced that a plan to unwind its more than $4 trillion balance sheet would commence in October. Both policy measures can have the effect of tightening monetary policy and raise rates. Higher rates in turn can make gold, which doesn’t bear a yield, less attractive compared with assets with rising yields.

Gold opened lower in early Asian tradin as weekend uncertainty passed without incident. Merkel’s win in the German federal elections and a quiet news weekend on the North Korean front, saw the US dollar opening stronger and gold’s weekend safe-haven premium eroded from Friday

The spot gold price fell during Asian morning trading hours on Monday September 25, as the dollar strengthened and a quiet weekend on the North Korean front saw a further deterioration in any risk-off sentiment.

Gold prices dropped on Monday, andhovered around one-month lows hit last week, weighed down by afirm U.S. dollar and as concerns over the Korean crisis easedover the weekend.

Merkel's win in the German federal elections and a quietnews weekend on the North Korean front, saw the U.S. dollaropening stronger and gold's weekend safe-haven premium erodedfrom Friday.

The euro slipped on Monday after German Chancellor AngelaMerkel won a fourth term in a weekend election, but facedleading a much less stable coalition in a fractured parliamentas support for the far-right party surged.                    

Last week, the Fed announced it would begin trimming down its $4.5 trillion in assets and signalled it will likely raise rates again this year. With the market increasingly expecting another US rates rise by year-end, this should continue to lend support to the dollar tis pushing down gold prices further.

FOMC Meet breaks down gold

It is rather remarkable to think that less than a month ago, gold shot up on the back of a missile firing in North Korea and the assorted baggage that came with that. The market was scared and gold was the major beneficiary. Now here we are, with the price of gold almost fifty dollars lower, but nothing has really changed. Trump is threatening total annihilation of North Korea, to which I am sure Kim Jong Un will have something to say or do. And now in addition to that, the US President is picking another fight, this time with Iran, with inflammatory comments at the UN yesterday. It does indeed seem that the markets have very, very short memories. But among all this, this week’s focus shifted to the much awaited FOMC meet, its concluding statement and what the Fed would say about balance sheet reduction.

On Nov 25, 2008 The Fed announced it would begin buying assets for its own account to save the world. In Oct 2014, The Fed ended its QE3 buying program but continued to reinvest the proceeds to maintain its $4.4 trillion balance sheet. Today, Janet Yellen announced the balance sheet will be allowed to normalize, with reinvestment slowed/stopped starting in October.

Let take a quick look at the key highlights over the Feds statements of the meet:

• Hurricanes are unlikely to change economy’s course medium term
• Economic activity has risen moderately and job market has strengthened
• Rates kept unchanged as Fed plans balance sheet runoff in October
• Fed signals another hike in 2017 and 3 more in 2018

As expected, the Fed announced it will begin reducing bond reinvestment's, starting by $10 billion per month and growing to $50 billion.

Gold prices settled higher Wednesday but slipped in electronic trading after the U.S. Federal Reserve's decision to keep interest rates unchanged

The price of spot gold has cracked back below the $1300 on the run up in the dollar after the FOMC decision. The precious metal is trading at the lowest level since August 28th.

In electronic trading after the Fed statement, prices traded lower at $1,310.70. The central bank said it will taper its $4.5 trillion balance sheet by $10 billion per month, the first reduction in nine years. Meanwhile, the Fed's interest rate projections, known as the dot plot, suggested a rate hike in December and three more in 2018.

A spill over effect of this meeting was clearly seen on gold as it broke the important trading level of $1300.

Wait, Watch and Then Work

In 2016, gold was seen climbing 6% from $1050 to $1150 and another 10% gain during the first half of this year, in July and again in early August, gold prices dropped down to $1210, before rallying back up both times to $1290 and $1350 per ounce respectively. This back and forth price action has some investors worried if this is a real bull market in gold or yet another flash in the pan for the coveted yellow metal?

Reasons being more than one, Investors arereturning to gold again to prudently diversify their stock-heavy portfolios.  That’s very bullish for gold, as investment capital inflows can persist for months or even years.  This shift is most evident in the yellow metal.

There are a couple of issues pushing and pulling at the market. The reaction to the missile launch last week has been a bit negated by that better-than-expected (US) inflation number.

Spot gold slipped on Friday, shrugging off North Korea's latest missile launch over Japan, with strong US inflation data raising the spectre of another interest rate hike.

Let’s have a look as to how each factor was responsiblefor this wave like movement in gold prices.

North Korea - North Korea fired a missile on Friday that flew over Japan's northern island of Hokkaido far out into the Pacific Ocean, South Korean and Japanese officials said, further ratcheting up tensions after Pyongyang's recent test of a powerful nuclear bomb.

US Data - Geopolitical risks can boost demand for safe-haven assets such as gold and the Japanese yen. The yen slipped against the dollar on Friday, after earlier having risen on the news, with the greenback supported by strong US consumer inflation data.

Gold pared losses after data on Friday showed U.S. retail sales unexpectedly fell in August and industrial output dropped for the first time since January due to the impact of Hurricane Harvey.
Friday's numbers were in contrast to strong U.S. inflation data on Thursday which increased prospects of an interest rate hike in December.The Fed's next monetary policy meeting begins on Sept. 19 and now the marketis increasingly focusing on the Federal Reserve and its probability of another rate hike this year.

The Fed has a 2 per cent inflation target, and a series of subdued inflation readings have dampened expectations for further rate rises in the near term. Firming inflation could support the case for another rate hike. Interest rates tend to boost the dollar and push bond yields up, putting pressure on gold.

ECB - Gold fell on Friday after a European Central Bank official called for scaling back the bank's stimulus programme; although losses were capped when weaker than expected U.S. economic data raised questions about further rate hikes.

ECB board member Sabine Lautenschlaeger made the most explicit call so far from an ECB policymaker for paring the bank's 2.3 trillion euros money-printing programme.

Data showing that euro zone wages grew at their fastest rate in two years in the second quarter bolstered the case for reining in ECB stimulus.

This was rather a bad news for gold because this continues the trend of the market pricing in the normalization of monetary policy.

But he said there had already been plenty of headlines about the ECB planning an exit from its bond buying and the U.S. Federal Reserve reducing its balance sheet after its big quantitative easing programme.

Those "normalisation" actions by central banks tend to drive rates higher, push bond yields up and put pressure on gold, a non-yielding asset.

Summing it up, though the previous week saw gold moving like a see saw; the focus now shifts to the important FOMC meet due on 19th September. Wait, Watch and then Work would be the only trading tip for the time being.

Strong Rally in Gold Prices RSBL

We have seen gold nearing a 1 year high over the past few months. But what has supported this rally for the yellow metal? 

Lately, uncertainty in many forms has played a key role. This past week's nuclear test in North Korea shook investors, sending them fleeing to safe-haven investments such as gold. In addition, uncertainties over Congress's ability to pass corporate tax reforms, which are being counted on to boost U.S. GDP growth, have some pundits favouring gold relative to stock-based equities.

Last Friday, the spot gold price was trading at $1,352.50/1,352.90 per oz, up $5.2 from the previous trading day’s close. 

Gold prices were well-bid on Friday September 8 as weaker-than-expected US economic data and the ECB’s decision to leave interest rates unchanged, as well as continued geopolitical risks, maintained pressure on the dollar.

Let’s take c closer look at all the influences- 

US Dollar-Uncertainty and lower-than-expected inflation rates have been doing a number on the U.S. dollar. In recent weeks, the dollar hit multiyear lows against the euro and at least one-year lows against a handful of other major currencies. 

In recent months the dollar has suffered from multiple issues forcing it lower against other major currencies, including political failures, multiple climate-related disasters, geopolitical tensions and weak inflation in the US.

The latter, in particular, has made it more difficult for the Federal Reserve’s Federal Open Market Committee (FOMC) to justify hiking interest rates

The dollar index on Friday morning was down 0.08 to 91.45. Overnight US jobless claims surged to a two-year high because of Hurricane Harvey, which raised doubts over further US interest rate hikes in December.

The dollar and gold usually move in opposite directions, meaning the dollar's weakness has been a green light for gold investors.

ECB Meet- ECB policymakers indicated at their meeting overnight that the European central bank was not intending to weaken the common European currency, which is expected to support euro performance in the short-term. The ECB maintained rates and upgraded its growth forecast this year by 0.3ppt to 2.2%, but maintained its 2018-19 forecasts.

Hurricane- Meanwhile gold prices jumped today morning as an earthquake off the coast of Mexico added to the hurricane damage in the Caribbean and US east coast in driving demand for the traditional safe haven.

U.S Data- The tally was the highest level for initial claims since April 18, 2015, when it was also 298,000, the government said. 

Consensus expectations compiled by various news organizations called for initial claims to be around 241,000 to 242,000. The government left the prior week’s tally at the previously reported 236,000.

Gold prices rose after a Labor Department report Thursday showing that initial weekly U.S. jobless claims surged by 62,000 to a seasonally adjusted 298,000, with the government citing the impact of Hurricane Harvey.

Geopolitical tensions- Geopolitical risks also remain at front of mind, with the USA pushing hard for additional sanctions against North Korea. This kept safe-haven buying relatively strong 

Persistent North Korean tensions and general US dollar weakness propelled gold $15 higher to new 2017 highs overnight, touching $1,249.98 and closing just below at $1,249.50. 

Geopolitical events have boosted precious metals prices. Gold prices continue to push higher, underpinned by geopolitical concerns over North Korea. For any further escalation in the on-going tensions, gold is likely to remain in demand. 

FOMC Meet and Interest Rate Hike-A combination of stubbornly low core inflation and rising doubts about the Trump administration’s ability to pass new legislation has been underpinning the situation. 

Specifically, the failure of high asset prices and strong labour market growth to pass through into underlying inflation is bringing into question how much further the FOMC will be able to lift rates in the near term. While the healthcare bill fiasco and lack of detail around both tax reform and infrastructure spending have underlined the difficulty of turning rhetoric into reality when it comes to shifting growth onto a higher structural path. In consequence, markets have been remarkably sanguine about the FOMC’s anticipated announcement of balance sheet reduction at their September 20th meeting and are now only pricing 25% chance of another hike by year-end.

Prices are closing in on last year’s highs so some nervous profit-taking may emerge, leading to choppy trading, but the combination of North Korea, a weak dollar and low treasury yields are all supportive. Silver and platinum may well follow gold, but palladium prices that are already elevated, may struggle more.

Although this combination of factors clearly presents a constructive cyclical backdrop for gold prices, the extent of the recent rally has surpassed what can be explained by just US rates and the weak dollar. 

Gold steady ahead of Sept. FOMC Meet

After rising for 3 days, gold prices weakened globally and on the domestic front too on weak global cues and easing demand by local jewellers.

Trump reached a surprise deal with Democrats on Wednesday to raise the short-term US debt ceiling, reducing concerns over a potential government shutdown and denting safe-haven demand.

President Donald Trump on Wednesday warned that the US would no longer tolerate North Korea's actions but said the use of military force against Pyongyang will not be his "first choice".

Gold stabilised early on Thursday, sustained by a weaker dollar and enduring concerns over North Korea, as markets awaited the outcome of a European Central Bank (ECB) policy meeting.

Spot gold was little changed at $1,334.06 per ounce during Thursdays trading hours, after easing 0.3 per cent in the previous session.

The dollar edged down against the yen on Wednesday, pushed back toward a recent 4-1/2-month low by the simmering tensions over North Korea and by comments from a Federal Reserve official about subdued US inflation.

Following suit, the dollar remained submissive on Thursday and the euro stood firm ahead of the ECB meeting where President Mario Draghi is expected to start laying the groundwork to withdraw monetary stimulus.

Currently, the escalating geopolitical tensions are bringing a rally in gold prices and the chances of the unrest rising further are high. If North Korea does another missile test, it will trigger risk-off trade thus proving to be of further help to gold.

The market is likely to continue focusing on geopolitical tensions, but it will start to shift focus to the Federal Reserve meeting in September, looking for details on reducing the balance sheet.

The two-day Federal Open Market Committee meeting (FOMC) is due to begin on Sept. 19 and the US central bank is widely expected to leave rates unchanged.

This could create some plunging pressure on gold starting next week and a rebound in the dollar for a short term.

Bullish sentiments for gold

Gold for the week ended with a good sign, as it posted gains in the Friday session, continuing the upward movement we saw on Thursday.

In the North American session, gold was seen trading at $1323.74, up 0.18% on the day. This rise was seen post the release of the labor report told prices have enjoyed a strong week, gaining 1.9%.
The metal showed some strong gains earlier on Friday, as the metal touched a daily high of $1329.05, its highest level since November 2016. These gains were triggered by the disappointing non farm payrolls and wage growth reports for August, both of which missed their estimates.

On the release front, US job numbers were unexpectedly soft. Non farm payrolls slowed to 156 thousand, well below the estimate of 180 thousand. Wage growth also disappointed, as Average Hourly Earnings posted a small gain of 0.1%, shy of the estimate of 0.2%.

Although the US labor market remains tight, investors are fretting about the lack of wage growth, which has contributed to the low inflation which continues to hamper the US economy.

The Federal Reserve will also be perturbed by small wage growth, as a December rate hike is very much in doubt due to inflation levels which obstinately remain well below the Fed's inflation target of 2.0%. Currently, the likelihood of a December rate hike stands at just 36%

Gold is traditionally considered a safe-haven asset, and often benefits when investors get jittery and lose their risk appetite. Such was the case last week, as renewed tensions between the US and North Korea early in the week propelled the metal above the symbolic $1300 level.

On Tuesday, North Korea fired a missile over Japanese territory, drawing sharp condemnations from Japan and the US, with President Trump declaring that "all options remain on the table"

In times of uncertainty or crisis, investors typically take refuge in “safe” options like the Swiss franc, gold or the US dollar, but under President Donald Trump the greenback has lost its lustre, especially to the euro.

Although, tensions have since eased somewhat, if North Korea decides to fire another missile towards Japan or the US military base on Guam, gold prices will likely move higher. As well, as the markets digest the disappointing job numbers, we could see risk appetite continue to wane early next week, which could extend the current gold rally.

The reaction to the lackluster U.S. Non-Farm Payrolls (NFP) report suggests gold will continue to exhibit a bullish behavior ahead of the Federal Open Market Committee (FOMC) interest rate decision on September 20 as mixed data prints coming out of the economy sap bets for another rate-hike in 2017. Even though ‘the Committee expects to begin implementing its balance sheet normalization program relatively soon,’ the fresh forecasts from Chair Janet Yellen and Co. may ultimately heighten the appeal of gold if central bank officials attempt to buy more time and project a more shallow path for the Fed Funds rate.

In turn, U.S. Treasury Yields may stay depressed throughout the remainder of the year, and the precious metal may continue to retrace the decline from 2016 amid the shift in trader behaviour.
Weak U.S. economic data has effectively removed the Fed’s prospective rate rise scenario from the gold price equation – at least for a couple of months although may have an impact in November as speculation will reign over whether the Fed will implement another small rise in December, or kick the can down the road again.  The U.S. dollar is looking weak and a weak dollar tends to see the dollar gold price rise. And it is the dollar gold price which the market judges to be the most important indicator, even though the gold price in other currencies, like the euro or the yen, should perhaps be more relevant.

The seemingly increasing threat of war between North Korea and the USA, will likely give the gold price a huge boost in the days and months ahead with safe haven demand escalating worldwide – and particularly in Asia and the U.S. itself.