Investors Increasing Their Gold Exposure

When some people just started writing off gold last week stating that it was a bubble, the yellow metal once again proved its opposition wrong.

Though gold consolidated in a narrow range of $1528 to $1493 till Thursday, it did manage to pop up on Friday.

Gold has risen nearly 8% so far this month and about 19% this year, and was set for a fourth straight week of gains.

Gold prices rose by 2% on Friday as investors construed U.S. Federal Reserve Chair Jerome Powell’s speech as leaning toward a dovish monetary policy stance and President Donald Trump’s latest comments exacerbated trade tensions with China.

Powell said the U.S. economy is in a “favourable place,” but gave few clues about interest rate cuts at its next meeting. However, he listed a series of economic and geopolitical risks the Fed is monitoring, noting these were linked to the trade spat.

Spot gold rose 1.9% at $1,526.60 an ounce on Friday, shaking off slight headwinds ahead of the Fed Chair’s speech.

Prices earlier rose to $1,528.79, the highest since Aug. 13, when spot gold had scaled a six-year peak of $1,534.31.

Contradicting to the price rise, data released showed that US jobless claims dropped 12,000 to seasonally adjusted 209000 for the week ended on Aug 17. The IHS Market Flash Purchasing Managers Index came at 49.9 below 50 levels for the first time since Sep 2009. The yellow metal hits an intraday low of $1493.44 and is currently trading around $1495.99.

Markets were eyeing US Fed Chair Powell's speech in Jackson's hole symposium for further direction.

Some early comments revealed that FED is going to be dovish but not outright one and the rate cut won’t be on accelerated mode.

The US 28.10y yield inversions are the real headache for economists whether or not the recession is coming now.

But the real culprit might be the USD-CNY i.e. Yuan on its depreciating fast and sooner it would be bringing more uncertainty and uncertainties are the best time to put money into gold.

Trump tweeted on 21st August that he is hoping a china deal. Fed minutes revealed all expected scenario and two of the members of the Fed actual wanted. 50% rate cut and finally did.25% last month and overall commentary was dovish and more centred around global economic weakness. Trump also ratcheted up the rhetoric on China, ordering U.S. companies to look at ways to close operations in the country, which sent equities tumbling and drove further inflows into safe-haven gold.

This came after China unveiled retaliatory tariffs against about $75 billion worth of U.S. goods.

The fact that Powell said that they (the Fed) will act appropriately to sustain expansion is pretty bullish for gold. The two primary tools they have are quantitative easing (QE) or lower rates - both those tools will cause gold to go higher

Powell’s speech prompted a backlash from Trump on Twitter, asking whether the Fed chair was a greater “enemy” than China’s leader Xi Jinping.

In normal times, investors need lower prices to persuade them to park their money for ten years, but when trouble is brewing, they are prepared to pay more for a secure long-term home for their cash.

Conventional thinking has it that gold, along with other “hard assets” such as real estate, flourishes when an economic boom, with attendant inflation, is driving investors and traders away from conventional securities such as cash, stocks and bonds and towards investments likely to hold their value.

There are three reasons why we believe that now is the right time to think about increasing gold exposure.

The first would be that broad market valuations are high, which would suggest that equity returns over the next decade could be lower than in the past decade. Historically, that has often coincided with strong returns for gold and gold equities.

Secondly, the case for the US dollar over the coming decade is weak. Primarily, this is the function of very large US deficits. Again, when the dollar is weak historically gold has performed well.

Finally, the most important; there are global macro policy risks. These are as likely today as at any point since the Second World War and the cause of that are record-high global debt burdens.

The risk here is that macro policy responses could continue to be unconventional and potentially become more extreme, driving real interest rates very low or even negative.

So as per our Managing Director Prithviraj Kothari's opinion, gold seems to be the best option to park your funds.

Play Cautiously and Take Utmost Care While Trading

Gold prices have risen nearly 16% this year, and by around $ 100 an ounce this week, as investors turned to the precious metal seen as a safe haven amid the bruising US-China trade and currency war.

As the week opened, PBOC of China fixed Yuan at 6.97% against the dollar and Trump and US Fed commented that China is acting as a currency manipulator. As mentioned previously that whatever Trump has done against China in its history is the worst trade war of this decade. There was obvious that pain boomeranged into the US markets and Dow slipped nearly 750 points on Monday- the worst single-day fall of 2019. And big time sufferers are US companies and global economies as they are on the verge of recession.

Gold hit $1485 and that was a major target that I made clear over the time and now this parabolic rise should stop unless China does something nasty to un-nerve.

The dimming global economic outlook, fuelled by heightening trade tensions between the U.S. and China are boosting gold’s appeal as a hedge against financial turmoil.

Gold is likely to show higher volatility and now overall range is expected to be $1500-$1550.

Despite Chinas commitment, the PBOC fixed Yuan at a higher level and fixed USD/CNY at 7.05% on Wednesday. Gold is once again moving to new calendar year highs and it hit $15 higher. Now gold is also behaving like currency when there is a losing streak for USD as the global currency status. These are extraordinary times and no matter how the USD index or the US data comes out, there is next big leg of rally possible on both.

On Thursday, gold showed an intraday volatility of +3%. This kind of fluctuation exhibited in the global markets too. Meanwhile gold hit 5.5 years high of %1522 and also made the single biggest gain of 3 years at 17.25. Moreover, the US-China trade war has been intensifying in a slightly uglier manner and this is adding fuel to the rally in gold prices.

Gold is at a record-breaking high in the domestic markets too. Gold prices on Thursday soared past the Rs 38,000-mark for or the first time rising Rs 550 to hit a fresh high of  Rs 38,470 per 10gm here in the capital.  In Mumbai, agency reports pegged the price of 10gm of standard gold (99.5 purity) at Rs 37,091, while pure gold (99.9 purity) cost Rs 37,240 on Thursday.

Gold remains relevant given the elevated economic and geopolitical risks. Investors will continue to shift their strategic portfolio positions in favor of gold. But Our Managing Director, Prithviraj Kothari advises all the investors to play cautiously and take utmost care while trading in these high volatile patterns.

Be Vigilant to Be Ahead

With even a minor drop in gold prices, many players in the market start doubting gold’s rally and raise questions about the gold bubble. Similar things happened this week.

Initially, gold was pulled down. Mario Draghi positioned up a September easing package but that wasn’t enough for the gold market. It hit $1433 after the initial ECB statement but the lack of action resulted in a drop in gold prices as it was down by $9 to $1416.

The ECB left interest rates unchanged at its meeting on Thursday, but its President Mario Draghi signaled that the bank was prepared to cut rates in September.

Market participants are now looking forward to the U.S. central bank’s monetary policy meeting, where it is expected to trim its interest rate by at least 25 basis points.

President Trump stressed his point to US Fed to do a sharp interest rate cut, rather his recently appointed member Shelton advocated for 50bps cut.

U.S. GDP data, which is due on Friday, is expected to show that U.S. economic growth slowed to 1.8% in the second quarter from 3.1% in the previous quarter.

If markets decide that the Trump administration’s commitment to the strong dollar is under review, investors are likely to sell the US dollar hard, including versus gold.

Furthermore, China added more gold to its foreign reserves in June, for the seventh month in succession. In fact, it is not the only country that’s piling up gold.  In 2018 alone, central banks bought 651 tonnes of gold, up 74 percent compared to 2017 and the highest level since 1971. Over the past decade, central banks have purchased more than 4,300 tonnes of gold, taking their total holdings to around 34,000 tonnes today. The trend has continued in 2019, with net purchases reaching 90 tonnes before the end of the first quarter

Central bank purchases of gold are no guarantee that gold prices will rise but they indicate to the wider investing community the underlying and potentially price-supportive demand for the precious metal. Also, historically, a rise in international tensions has proven somewhat supportive of the gold price, and there is certainly no shortage of that at the moment.

A lot of fuel is expected to be added to keep gold supported. Given the ongoing tensions in the Gulf, the various trade disputes and other geopolitical uncertainties, Prithviraj Kothari expects gold prices to strengthen further.

Gold traders should place stop at $1409.5 (i.e. breaking this will straight-pull it down to $1400) be vigilant. Buy at $1414 for targets $1422-$1425 at most towards advance GDP data.