Gold looks moderately bullish

This week is all about the much awaited FOMC meet. The Federal Open Market Committee meets between Jan. 29 and Jan. 30, and Chairman Jerome Powell is widely expected to acknowledge growing risks to the U.S. economy as global momentum weakens.

Speculations prevailed in the market that the Federal Reserve will keep its interest rates unchanged during its two-day policy meet. This led to a spike in gold prices, nearing a seven month high during the day. But later gold steadied.

Gold has a tendency to appreciate on expectations of lower interest rates, which reduce the opportunity cost of holding non-yielding bullion.

Currently, the European Central Bank is seeing downside risks to the economy. ECB President Mario Draghi warned last week that a dip in the euro zone’s economy could be more pronounced, comments seen as signalling a delay in the bank’s first interest rate hike.
Amongst this scenario gold is portraying a strong chance of solid upward movement.

Furthermore, the US Fed is also expected to be more accommodative. The Fed has already raised its interest rates four times last year. It has even given hints that it might life borrowing costs twice in 2019.  Analysts noted that Federal Reserve policymakers recently lowered their forecasts for 2019 from three rate increases to two. This should support gold.

This uncertainty is bringing about a rally in gold prices. Moreover, global equities, particularly Asian stocks rose higher, as Wall Street rallied after a deal was announced to reopen the U.S. government following a prolonged shutdown that had shaken investor sentiment.

There were great concerns over a slowing global economic growth and this shutdown has only increased the worries of the market. Not forgetting, the, signs of stress in corporate earnings and a still unresolved Sino-U.S. trade war.

Meanwhile we also expect a rise in demand for gold, especially in Asia. Usually gold is bought in Asian countries for weddings, occasions etc. But lately gold is being purchased for investment purposes. Investment demand for gold rises with an increase in wealth. In recent years, both China and India have rapid increase in the demand for gold, especially China. These countries have been active drivers of holding the metal in its physical form.

With regard to preservation of wealth, gold has an immensely long track record; providing a hedge against inflation, geopolitical risks, natural disasters and other crises. Currently private banks and wealth advisers might typically advise their HNW clients to hold about 3-5% gold in their investment portfolios. While an ETF provides gold exposure and is an excellent tool for short-term trading, physical gold is preferable for medium to long-term investment as it is highly liquid, lacks counterparty risk and affords investors more flexibility. Unlike property or stock funds, physical gold is a highly efficient wealth management tool for estate planning

Since gold has long been used as a safe haven asset the outlook for the yellow metal looks moderately bullish now.

The main trigger for sustained higher gold prices comes in the form of a gradual asset rotation from equities and other risky assets into bonds and safe-haven assets such as gold, as mainstream investors seek protection from market turbulences, potential recessions and growing bearish sentiment.

Moreover, the downside is somewhat limited, with current gold prices representing a floor, as bearish drivers are lacking, fundamentals are neutral and costs for the most expensive producers are close to current prices.

Gold has not Lost its lustre yet

Gold was at a life time high of $1921 an ounce in September 2011 when the US Federal Reserve was concluding its bond buying program (QE). During that period gold was everyone’s favourite metal. But by the end of 2015, gold prices declined to $1046. Sometime around that, the Federal Reserve, led by Janet Yellen has raised its key interest rates for the first time in 7 years. That’s the reason gold plunged. But now it seems that gold is finally emerging from an 8 year bear market. And that’s the reason we feel that gold has not lost its lustre yet.

They say that gold has an inverse relation with the dollar. When the dollar is strong gold is weak and vice versa.

It seems that gold has finally made a comeback and there are many factors responsible for this -
Gold seems to be driven by the fact that the current political standoff in Washington will lead to an escalation in crisis. Further the longest government shutdown in U.S history along with a gradually growing economy and rising global debt levels will add fuel to the fire. And when geopolitical issues are mentioned we can’t ignore the fact that the trade tensions between US and China have not been resolved yet. These factors strengthen the speculation of a push in gold prices.

Even though the dollar was up during the week, markets still prefer to stay loyal to gold.

Market watchers say the dollar may also come under pressure as the U.S. government shutdown begins to weigh on domestic growth. Having said that, gold prices are bound to rise.

Gold gaining popularity

Gold ended 2018 on a high note, beating global equities and commodities for the fourth quarter. Gold is a highly liquid asset and hence investors are majorly diversifying their portfolio towards gold as it proves to be a hedge tool and a safe haven asset in times of uncertainties.

There is quite some scope for the yellow metal and commodities in general in 2019 because investors believe that the current rate hike cycle has peaked and the U.S. dollar looks to be in retreat, having lost about 1.7 percent over the past month.

After four rate hikes in 2018, the Federal Reserve pausing interest rates in 2019 could also result in a weaker dollar and stronger demand for gold.

Gold is currently trading at $1,290 and moved in the high and low range of $1,295 and $1,287 on Tuesday. But this pullback is expected to be short lived as China is stepping up monetary and fiscal stimulus efforts to support its sagging economy. The People's Bank of China (PBOC) injected a record CNY 560 billion via reverse repo operations earlier today. Further, China is reportedly planning large scale tax cuts to boost spending.

History shows that monetary and fiscal stimulus has a positive impact on gold. Further, current unrest and political uncertainty in the UK could boost demand for the yellow metal.

Though strong U.S. dollar might have thwarted gold, but global growth concerns and other broad market worries could give the precious metal a boost.
Currently the markets are uncertain, economic numbers are dipping and stock markets are volatile.  All these clubbed together are bound to give a push to the precious metals as investors look up to them as safe haven assets. 

Is 2019 the year for Gold

2018 has a highly volatile and fluctuating year for gold as it faces many headwinds. A strong dollar, rate hikes by the US Federal Reserve (the Fed) coupled with accommodative policy from other central banks and a US economy buoyed by tax cuts, fuelled positive investor sentiment and pushed US stock prices higher through the start of October.

However, as geopolitical and macroeconomic risks increased, emerging market stocks pulled back and developed market stocks eventually followed.

As 2019 begun, have seen a sharp deterioration in risk sentiment following soft macroeconomic data in December and renewed concerns about the future direction of growth, particularly the risk of U.S. growth catching down towards weaker economies. December was a volatile month which generated a safe haven appeal for the yellow metal.

Lately gold has outperformed other assets in its class. Risk assets took a big hit in 2018, with the stock market suffering the worst in December but gold fared much better as it grew around 4 percent.

If we see the demand graph for gold for the next 6 to 8 months, we expect it to rise as it will benefit from the interplay of market risk and economic growth, with key dynamics, such as financial market instability, monetary policy, the dollar and structural economic reforms.

Rising geopolitical tensions- A fragile political alliance in Spain along with fending off secessionism, an instable monetary union in Italy, and internal turmoil in Europe and lastly social unrest in France- all of these clubbed together gave a very instable global picture. This growing uncertainty and the expansion of protectionist economic policies are making gold an increasingly attractive hedge tool.

Slow economic growth- Weak economic numbers coming from the US has spooked the markets. The U.S. manufacturing PMI (Purchasing Managers Index) hit a 15-month low in the same month. Manufacturers' confidence in business also slipped to the lowest level in nearly two years. This in turn affects the rate hike frequency thus influencing gold prices.

Federal Reserve’s monetary policy- The Fed had been tightening monetary policy aggressively. But on Jan. 4 Fed Chairman Jerome Powell signalled Wall Street that policymakers will be patient with policy moves and are attuned to the messages coming from markets. While gold may face headwinds from higher interest rates and dollar strength but currently the effect of the same seems to be limited on gold as the Feds stance is neutral. Any delay in rate hike will push gold prices higher.

Demand for gold as a hedge tool- Globally, there were net positive flows into gold-backed exchange-traded funds in 2018. However, North American funds suffered significant outflows in the second and third quarters, with this trend only reversing in the fourth quarter as risks began to intensify. But in 2019, global investors are expected to favour gold as an effective diversifier and hedge against systemic risk on multiple global metrics

Central Bank Buying- In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Higher demand once again means higher prices for gold.

Time and again it is proved that gold has delivered returns and has performed better than other assets in its class. Moreover, its liquidity and risk adjusted returns makes it an investors favourite and hence its looks more relevant this year.

Gold benefits from equity slide

Reserves Reserves Reserves - it was all about piling up gold in the past week. And when I Say piling I mean in huge numbers.

Peoples Bank China shocked the world when it’s released the figures of gold reserves that it sits on.  China's gold reserves had been steady at 59.240 million fine troy ounces from October 2016 to November 2018, according to data from the People’s Bank of China, and suddenly jumped to 59.560 million fine troy ounces at end-December.

The People’s Bank of China increased holdings to 59.56 million ounces by the end of December, or about 1,853 metric tons, from 59.24 million ounces previously, according to data on the central bank’s website. They had been unchanged since about 130,000 ounces were added in October 2016.
China has long been wanting to reduce its dependency on the US dollar. The ongoing trade war is threatening its economic growth.

Several large emerging economies, which today fuel most of global growth prospects, and major oil exporters, are intrigued by the idea of re-coupling gold with a multilateral currency basket to avoid excessive exposure to US dollar-denominated energy and commodity markets.

 Spot gold had its strongest month in almost two years as those fears spurred a whirlpool in equities and the dollar and boosted demand for the precious metal as a haven. And hence the world’s biggest producer and consumer boosted holdings of bullion.

But it was not an overnight thing. China has been piling reserves since quite some time. It had last released the figures in 2016 and now suddenly. And it’s not just China that has been doing this.  As Bloomberg reports, Poland and Hungary surprised the market in 2018 by adding to their gold holdings for the first time in many years.

Furthermore, there have been interesting shifts in gold reserves. While advanced economies, such as the US and Germany, still own most global gold reserves, the US has increased its gold holdings in the past decade only marginally, while Germany has been forced to cut its reserves. In contrast, China has tripled its reserves, while Russia has nearly quintupled its gold (after dumping billions of US Treasuries), despite rounds of sanctions.

Fresh comments coming in from Federal Reserve Chairman Jerome Powell on Friday, got in a fresh rally in gold prices. The statements released boosted the chances that the central bank will pause interest-rate increases. Speculation that the Federal Reserve may pause its interest rate hikes has given further strength to gold’s rally into the new year and assets in bullion-backed exchange-traded funds are at a seven-month high. Spot gold was trading 0.5 percent higher at $1,291.83 an ounce as the week ended. Strengthening of the yellow metal has further weakened the greenback.

Gold was out of favour for much of 2018 as a result of the strong dollar and interest rate increases in the US. The precious metal traded as low as $1,174 an ounce in August, despite rising geopolitical tensions.

However, sentiment began to improve towards the end of the year, as volatility increased further and US stocks suffered.

THOSE analysts who believe that fear has made a comeback argue that gold is benefiting as equities slide and investors are increasingly concerned about the economic prospects of the United States (US), China, Europe and Japan. Yet, even at $1,290, gold still remains more than 30 percent behind its all-time high of $1,898 in September 2011 amid the US debt-limit crisis.

Gold expected to outperform in 2019

Bullion hit a six-month high, nearing US$1,300 an ounce over the following concerns-

• Report showing a contraction in China manufacturing sent global stocks tumbling on 3rd January, 2019. 
• Concern over chains economic outlook
• Sinking factory gauges in Italy and Poland
• Wobbly U.S stock market
• Weaker economic data coming out of the European Union

Volatile stock markets, dollar swings and a global trade war sent gold on quite a market ride in 2018, from a high of $1366 an ounce in January 2018 to $1159 in August. Some were disappointed as they couldn’t make much of the dips or failed to enter the market at the right time.

Gold prices are still stuck in a trading range that it hasn’t broken away from over a couple of years. But analysts believe that this is the time to enter the market and change your strategies. It probably to best time own gold as 2019 brings some positive price rise in the yellow metal; Equity markets will expect high levels of volatility and its wild fluctuation towards the end of 2018 speaks all for it. Moreover the US government is sitting over huge debts and there are grave concerns that the economy will over heat. Moreover the Fed policy makers have been sending mixed messages as to how many times they will increase the rates in 2019. Keeping this in mind, it seems that it’s the perfect scenario for investors to seek safety in gold as it is expected to be the best performing asset in its class in 2019.

Gold looks moderately bullish in 2019

To recap, gold prices have held pretty firm in 2018. Trading just 5% lower versus the Dollar, gold has now risen back to last New Year's Eve for Euro and UK investors.

Gold futures on Monday closed out New Year's Eve with a loss for the session and year, but garnered some upward momentum as stock-market carnage reignited haven-related demand and as the dollar weakened somewhat. Weakness in equities over the past three months has given bullion some support, as has a weakening dollar over the past month. A weaker buck can provide support for commodities priced in the unit, as it makes it cheaper to users of other currencies.

Gold was expected to drop with the stock market, but instead it rose. It was expected that gold will behave the way it did in 2008. But there are big differences between now and 2008, it still looked likely that gold would get dragged down with the stock market when it dropped hard due to a flight into cash driving the dollar up but so far at least, this has not happened.

The biggest difference between now and 2008 is that back then money flooded into the dollar in order to buy Treasuries, but this time round that does not appear to be happening, and it is not hard to see why. Those who have been paying attention will know that other major powers like China and Russia have been preparing to dump the dollar for a long time now, by buying gold as fast as the West will sell it to them, devising their own payments systems to replace the SWIFT system and making bilateral trade agreements, etc. They also know that unless they have the military power to defend themselves, they would at some point be subject to military aggression by the U.S. if they try to cease using the dollar, hence their major effort to beef up their defensive capabilities.

Thus, what we are seeing is an intensifying buyers strike with respect to Treasuries that will continue to hike interest rates until the economy implodes, a process which has already started.

Thus, the fact that the dollar failed to rally either on the severe drop in the stock market of recent weeks or on the latest rate hike is viewed as an ominous development, both for the dollar itself and for the economy. This is what gold is picking up on and is the reason why it is has started to move ahead over the past couple of weeks.

• Gold over the medium term looks moderately bullish over the following influences-
• The rising frequency of US equity market draw down's
• The gradual unwind of QE
• Higher overall macro market volatility
• Elevated geopolitical risks should all continue to favor gold buying on the dips.

Currently, the biggest threat to the gold market remains the U.S. dollar. However, the greenback could less of a factor to the precious metals market if equity markets continue to push lower.

Though gold isn't guaranteed to rise in price but global issues might spark trouble for investors. So in order to maintain a balance, owning a little physical bullion, stored securely and ready to sell the moment you need looks like a wise decision, given the fact the 2019 has come into view and a lot of ups and downs are expected to shake the market.