Gold Might Perk In the Near Future

We all know that when gold prices rally, all market players join the bull’s bandwagon. Currently, also markets have not left a single stone unturned in proving the fact that gold will touch $2000 an ounce by year-end and cross Rs. 40,000 per 10 gram in the domestic market.

Well, it’s too early and even very difficult to predict even the near term gold price movements because there is so much happening around that stabilizing gold prices seem to be a far reality.

There are three reasons why gold has popped in the last several months -

• Recession risks that have gone up.
• Rates that have been trending lower
• 10-year real yields have gone from 1.2[%] to 25 basis points.

Last week following dovish comments from New York Fed President Williams gold prices traded above U.S. $1450. Less than a day later a spokesman for the New York Fed “clarified” Williams comments saying they were not about immediate policy direction.

If you found last week’s dovish Fed message followed by the backtracking in follow up news articles confusing you are not alone Geopolitical risks from the Persian Gulf could provide some support for the yellow metal, but the next major move will likely be if the Fed is dovish enough for markets. Last Friday, with US Iran tensions escalating, precious metals were seen at new 2019 highs.

Currently gold is at a 6,5year high but it couldn’t sustain. The $1415- $1420 in general is good support to revisit towards $1450-$1460.

After five years of being stuck in a trading range, gold prices have broken out in the last six weeks, igniting a rally to multiyear highs. Prices held near those highs on Monday as investors awaited word from the Federal Reserve about whether the central bank would cut interest rates at its next meeting.

Making the decision less clear cut, tensions between the U.S. and Iran continue to escalate, and with market pricing set at more reasonable levels, there is room for both the ECB and FOMC to deliver a dovish surprise at their upcoming meetings.

The year of 2008 brought 350 basis points of softening into US rates. And then it took a full seven years for the Fed to make another move when the Yellen-led Fed posed her first actual adjustment to the discount rate. Another hike followed in 2016, a little over a month after the US Presidential Election; and then a full seven rate hikes followed in 2017 and 2018. Suffice it to say, this was a stark change-of-pace to a market environment that many had come to rely upon.

Joining these series of events, 31st July at 11.30 pm (IST), The Fed verdict will be stamped and till these 8 days, the markets speculation will also continue.

On Tuesday President Trump stressed his point to US Fed to initiate a sharp interest rate cut. Rather his recently appointed Fed member Shelton advocates for 50bps cut.

So whatever happens on 31st July, gold is still expected to perk as dovish statements will be associated with the event.

In summary, despite the possibility that the current pullback has further to go, our managing director, Prithviraj Kothari feels that the uptrend in gold is likely to re-establish itself with potential towards the next upside target of U.S. $1480/1500.

Gold Is Still Very Reactive to Daily News

The increase in the price of gold is not only limited to US dollar; it is pretty much the same in virtually all major currencies in the world, Recently Indian Government has decided to increase import duty on gold. Our Managing Director- Prithviraj Kothari has advised the market to wait for more stability. There are quite a few reasons why the gold bull market might indeed have returned and that the latest price action is not just bubble.

Gold traders limited the range view before the testimony and were eyeing on $1390-$1392 once again as a final support.

Gold spent most of the week under $1,400 even though China added 10 tonnes to its reserves and Poland reported a large acquisition of 100 tonnes.

Wednesday gold moved decisively up to $1,426 on the back of Federal Reserve chair Jerome Powell's dovish comments at his semi-annual monetary policy testimony but then moderated with US inflation coming in above expectations overnight, although it has held above $1,400.

Spot gold rose 1.5% on Wednesday after Fed Chair Jerome Powell’s dovish remarks, where he confirmed the U.S. economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war, and said the Fed stood ready to “act as appropriate.”

This statement weighed on the dollar. The U.S. currency against major other currencies extended declines for a second session.

All eyes were focussed on Powell over the past week as he presented his key semi annual monetary policy before the congress. What needs to be remembered is that it was a two-day testimony and maybe the last key event before locking the 28th- 29th July verdict. The extent of dovishness depended on change of words that he put on soon after the strong US payrolls.

On the second day of the testimony, Powell almost reassured that he is not changing the stance of June (which was dovish and rate cut prone) as he sees lot of headwind and slowdown especially the trade war-related tensions that are affecting the global growth. Morgan Stanley however thinks that the Fed will cut 0.5% on 25th July.

Gold prices fell on Thursday, erasing gains made early in the day after stronger-than-expected consumer inflation in the United States cast doubts whether the U.S. central bank will cut interest rates as aggressively as expected.

Spot gold dipped 0.85% to $1,406.8 per ounce, dropping nearly $6 after U.S. consumer prices demonstrated a pick-up in underlying inflation, increasing in June by the most in nearly 1-1/2 years.

The core U.S. consumer price index, excluding food and energy, rose 0.3% in June, data showed on Thursday, the largest increase since January 2018. The U.S. Federal Reserve had last month downgraded its inflation projection for the year to 1.5% from the 1.8% projected in March.

Bullion rates were quick to slump following the data, shedding nearly 1% in the latter part of its session, with the dollar erasing some losses.

Gold prices inched higher on Friday as investors shrugged off concerns that stronger-than-expected consumer inflation in the United States could influence the U.S. central bank’s decision on aggressive monetary policy easing.

Spot gold rose 0.3% to $1,407.31 per ounce as during trading sessions, having touched $1,412.20 earlier in the session.

Fed policymakers are scheduled to meet on July 30-31, where investors will look for further cues on monetary policy easing. Nonetheless, gold remains a valuable asset amid rising geopolitical tension, growing macro uncertainty and a maturing economic cycle. The market expects synchronous rate cuts globally, which will make non-yielding gold attractive for investors.

Gold is still very reactive to daily news but it is forming a trading channel of $1,380 to $1,440 and the longer this continues the better - the market needs to consolidate before attempting another leg higher, which we feel is the more likely outcome than it breaking back down.

Market Should Wait for More Stability

Last week, the price of gold spiked above $1,400 per ounce, a level that, signals the beginning of a new bull market for gold. Many factors have been driving gold’s price higher, including recent changes in the U.S. Federal Reserve’s outlook that increased the chances of future rate cuts, the European Central Bank’s comments from earlier this month signaling that further rate cuts may also be a possibility in Europe, falling U.S. Treasury rates and a declining U.S. dollar.

The surge in the price of gold following the Federal Reserve meeting indicated a material change in market behavior as the adjustments to the Summary of Economic Projections (SEP) fuel betted for lower US interest rates.

Some disappointing numbers coming in from the US strengthened gold prices further. The US economy showed fresh worrisome signs on Monday as home sales and consumer confidence sank. Sales fell 7.8% to a five month low in a sign that low rates aren't spurring activity. Consumer confidence also dove to 121.5 from 131.0 as the expectations survey cratered. Those numbers added to the pessimism in the US dollar early and lifted gold for the sixth day.

On a day filled with economic data and Fed speakers, it was St Louis Fed President James Bullard who stole the market's attention with a hint that a rate-cutting cycle isn't coming. Instead of a series of rate cuts, Bullard implied there would be one or two.

Like a typical Bollywood masala movie, there were a lot of twists and turns that continued on Fed chief and other Fed members as FED GUV had appeared just before the Powell’s Speech on 25^th June, and he said that an emergency is not beyond the realm for the Fed.

Later Powell came out and stated that Fed and the independent Body don’t come under political pressure and that one weak data doesn’t necessarily mean a weak economy.
However, comments from St. Louis Fed President James Bullard, a 2019 voting member on the FOMC, suggested the central bank will insulate the US economy with an “insurance cut” as the official insists that a reduction of “50 basis points would be overdone.”

Moreover, Chairman Jerome Powell pointed out that the baseline outlook for the US economy “remains favorable and it seems as though the FOMC will take a more reactionary approach in managing monetary policy as the central bank head pledges to “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
With that said, details of a US-China trade deal may ultimately lead to a minor adjustment in monetary policy, but Chairman Powell and Co. may have little choice but to re-establish a rate cutting cycle as the Trump administration continues to rely on tariffs and sanctions to push its agenda.

These price movements had a spill effect in the domestic markets too. Local gold prices hit a record ₹35,960 per 10 grams on Tuesday, having jumped more than 10% over the past month. People generally don’t tend to buy gold in such a high volatile markets. Such high jump in prices is welcomed with a dampening demand as investors and consumers would prefer to buy gold in a more stabilized market.

So all in all, the DOW turned weak. The US 10y yields did not gain and still hover 2.00%. This is one indicator that rate cut will be there and dovish view has to be maintained by FED and that’s the reason that gold cannot be bought at $1405-$1425. Our Managing Director Prithviraj Chauhan known as The Bullion King of India has advised markets to wait for more stability and clarity on the global economic front.

BUDGET 2019

International markets didn’t witness much volatility as US market remained closed on 4th July over Independence Day.

Now there are 2 points to be noted-
Firstly, the US DOW is at life’s high at 27000 as the plunging yields are now at 1.94% US 10y. This indicates that the rate cut is bound to happen soon.

Secondly, the key number comes in from US payroll at 6.00pm IST. The Fed meet and broader expectation of 162k vs. last times 75k. Moreover, unemployment rate is expected to be at a decade’s high.

Till then market is expected to be trading in a narrow range.
As far as domestic markets are concerned, all eyes were on the much awaited budget, well named as Modi 2.0 budget.

A clean win this election for our respected PM Modi clearly indicates that the public has hopes with this government and expects it to work for the betterment of our country. Similar to these lines, the common man also had many expectations from this budget with respect to taxation, water managements, farmer loans and many other critical issues.

Even the gem, jewellery and gold industry had expectations that this budget would bring some relief to the sector where duty structure is concerned.

What was need was that the government should give a thought on how gold should be treated and how it should be classified into asset class. Once gold is classified into an asset class then other products like Mutual Funds, Insurance Fund, Pension funds should be allowed to invest into the yellow metal. The dollar rupee fluctuation can be hedged and interest rate can be covered on large scale.

Another need of the hour was to have a more organised gold market. Introduction of a trading platform/exchange to trade gold and all transactions should take place only on this platform. This would bring about transparency in its pricing, set benchmark prices and would benefit the end consumer on a large scale.

Gold has an import duty of 10 per cent, and market players wanted it to be pulled down to 4 percent to boost demand. But the government has proposed to increase the duty to 12.5 percent to mobilise resources. We need to wait and see how markets have accepted this rise in duty and what will be their reaction.

Investors parking funds into Gold

Gold is on a winning streak, shining brighter than before. Investors, households, traders and central banks around the globe are parking cash in it. Gold has rallied its highest in the last six years in the international market. In India, it hit it’s highest ever on June 25. In one month, gold has gained 12% and it appears the Bull Run for the yellow metal will last longer than one thought.

Gold prices have surged to the highest since 2013 as the U.S. and the global economy slow and due to the likelihood of a return to ultra-loose monetary policies. Rising geopolitical tensions in the Middle East and between an aligned Iran, Russia and China versus the U.S. is also leading to safe haven demand. U.S.-Iran relations have deteriorated sharply whereby war has become a very real possibly alas.

Monetary policies - The US Federal Reserve, the country’s central bank, did what many expected last Wednesday, and held interest rates steady while signalling that a rate cut is on its way. Now, meaning no change to the 2.25% to 2.5% range on the federal funds rate. Nine of 10 FOMC members voted to keep rates unchanged. The Fed reportedly dropped its pledge to be “patient” on widely anticipated rate cuts, meaning it could be poised to act. Also, Reuters said, Fed Chair Jerome Powell stopped referring to below-target inflation as “transient”. Reading between the lines gold traders took the message and ran with it, with the precious metal’s price hitting a five-year high.

Economic slowdown - Macroeconomic growth is falling all over the world. Joblessness is not peculiar to India, jobs are falling across the globe and investors are not comfortable opening their purse strings due to the uncertain economic and political environment. Hence, the cash will be parked in the safest haven, the value of which could possibly never come to zero.

US-China trade war - The other reason for gold being on a tear is the risk of the ongoing trade war spiralling into a currency war. If that happens, gold will turn into a bigger monetary asset, it will gain further.4he likelihood of more central banks joining in the race to buy gold will increase with the increase in anxiety about an uncertain future. Gold will also play as the most important asset class as global risks in equity markets rise.

Geopolitical tensions - Concerns arising out of mounting trade war and geopolitical tensions between the US and Iran have added to the dollar weakness and therefore lending an extra shine to gold. On June 25, gold hit its highest in six years, selling at Rs 35,800 per 10 grams, clawing back to 2013 level when it had touched the highest due to government’s desperate measure of an unprecedented import duty hike on the yellow metal

The result was an immediate jump in the gold prices. The rise in gold futures was even more dramatic, with gold for delivery in August rocketing to a fresh high $1,366.60. The last time bullion was priced that high was just over five years ago.

Weak Dollar - gold prices share an inverse relation with the dollar. When the dollar, the world’s most powerful currency loses shine, gold takes over from there. In the month of June, it shined the most, boosted on the back of a weakness in the dollar after the US Federal Reserve signalled it would cut interest rates, going forward, as the US economy was sagging.

Trade, economic and geopolitical uncertainty have seen safe-haven demand return and pushed prices higher.

Apart from this news what made headlines was the G20 summit which ended with a lot of positives and negatives.
Positives- Finally the US and China formally agreed for a re-talk of their completely stopped talks 6 weeks ago.

Negatives - Trump looked desperate for any kind of deal with China, which compelled markets to believe that there is some kind of deterioration of the US economy.  This happened following his face-saving comment on Huawei and later Kudley clarified that there is no big relief for this Chinese company.

His visit to the North Korean border didn’t go down well with the markets.
Some important numbers that market will track in the week are-
• China Manufacturing PMI
• US Manufacturing PMI

The month ended with a lot of glitters for gold as it claimed 6 years high of $1422 and is expected to see big ranges this week if there some kind of news coming in  from
• Economic data
• Trump
• China

Based on the futures markets we can say that if gold crosses 34005 then we can expect a rally of 34250- 34400. If it drops below 34005 then e can expect a further fall between 33875 to 33625.