RATE HIKE CREATING PRESSURE ON GOLD:RSBL

By Mr. Prithviraj Kothari, MD, RSBL

Firstly, I would like to express my sincere condolences on the death of our former President Mr. A P J Abdul Kamal. As we all know him better as the missile man of India, his loss means a lot for our country.

Moving on to his week’s bullion market. Well there was lots of hustle bustle in the market as there was no clue over the prevailing volatility in gold.

Gold was probably in the worst macro position it could be in: you have low inflation, high accommodation across the globe, US investment growth and the possibility of further increases in the US dollar.

Currently it seems like gold has been divorced by the market.

Bullion was set to end July with its biggest monthly decline in more than two years after a deep rout last week shook investor confidence further and drove prices to a 5-1/2 year low of $1,077 on July 24. The metal has lost 7.4 percent so far for the month, its steepest decline since June 2013.

Bullion is set for a 7.4 per cent plunge this month, the most since June 2013, after tumbling to the lowest level since 2010 last week. The metal fell as much as 1.1 per cent to $1,084.51 an ounce on Thursday, and was at $1,085.51 at 2:24 p.m. in Singapore, according to Bloomberg generic pricing.

The main culprit for this week’s volatility was the US economic data which in turn influenced the Fed's decision of an increase in interest rates which in turn fluctuated the dollar prices.

Gold and dollar typically move in opposite directions, which means if the dollar goes up, gold futures will fall as gold, measured by the dollar, becomes more expensive for investors.

Gold was headed for its largest monthly decline in two years as the Fed moved closer to boosting US interest rates for the first time since 2006.

While there were no clear signals from the Fed as to when exactly would the rate hike come in, they did describe job gains as solid amid an improving economy, according to a statement Wednesday.

Post the statement released by the Federal Reserve- now markets expect the hike to come in soon – probably this September.

Fed policy makers expressed satisfaction with progress toward full employment and used one word -- “some” -- to describe the additional gains it wants before raising rates.

Increasing rates reduce the allure of gold as the metal doesn’t pay interest or give returns like other assets such as equities and bonds. Investors have cut their holdings in exchange-traded funds backed with bullion by 3.6 per cent this month, the most since December 2013.

Report released by the US department of labor showed the employment cost index rising 0.2 percent, which is the smallest increase in 33 years.

Gold is an asset that pays no interest or coupon and the rate hike is certainly putting pressure on prices.

Gold slipped on Friday and was on course for a sixth straight weekly fall, its longest retreat in 16 years, after upbeat U.S. economic data encouraged bets on the Federal Reserve raising interest rates in September.

Data on Thursday showed the U.S. economy grew 2.3 percent in the second quarter, while first-quarter gross domestic product was revised to show growth of 0.6 percent instead of a contraction.

That reinforced expectations the Federal Reserve is on track to raise interest rates, possibly at its next meeting in September. Higher interest rates would increase the opportunity cost of holding non-yielding bullion.

The data followed the Fed’s policy meeting earlier this week at which policymakers concluded that the world’s largest economy is “expanding moderately”.

But once again, apart from the employment data there were other key economic numbers that came in and influenced gold prices in the opposite direction. Gold prices were trading in positive territory on Friday after mixed US data weighed on the dollar.

Prices fluctuated heavily throughout the week as a combination of a Federal Open Market Committee (FOMC) meeting and US GDP figures drew investors from the sidelines.

ETF- outflows of gold from ETFs are capping any real recovery in the metal’s price. Holdings in funds tracked by Fast Markets have decreased for 14 consecutive sessions and are now at their lowest since February 2009 at 1,537 tonnes.

PMI- Chicago PMI in July was 54.7, exceeding the forecast of 50.7 and the first expansion reading since April of this year.

Consumer Sentiment- University of Michigan consumer sentiment in July was 93.1, below predictions of 94.2

ECI- Thought the weekly unemployment claims were much lower than expectations, a simultaneous wage growth was nowhere to be seen. Employment Cost Index showed a 0.2 percent increase, below the 0.6 forecast and yet another example of persistently low wages.

Eurozone - German retail sales fell short at -2.3 percent as did French consumer spending at 0.4 percent and the Italian unemployment rate at 12.7 percent. Eurozone core consumer inflation however at one percent was better than the forecasted 0.8 percent while the flash estimate at 0.2 percent was as expected.

Traders said sentiment bolstered as the precious metals rose in global markets after a report showed wages and salaries in the US rose in the second quarter at the slowest pace on record, weakening the case for the Federal Reserve to raise interest rates.

The next important data release is U.S. non-farm payroll figures, due on Aug. 7 which will once again play a key role in influencing gold prices.

The primary purpose of this article by Mr. Prithviraj Kothari is to educate the masses of the current happenings in the Bullion world.

- Previous blog -
"Disappointing Week For Gold:RSBL"
 http://riddisiddhibullionsltd.blogspot.in/2015/07/disappointing-week-for-gold-rsbl.html

DOLLAR DRAWING DIRECTIONS FOR GOLD

by Mr. Prithviraj Kothari, MD, RSBL

                                                     

During the financial crisis in September 2008, gold price rose $50 in a single trading day on 18th September. Investors adapted gold as they perceived this asset to be a safe haven in terms of liquidity and security.  This day was marked in history as it was after February 1980 that gold had made such a huge jump in one single day. in 1979 and 1980, the world witnessed global uncertainty. At that time the key influencers for gold were the Russian invasion of Afghanistan and the Iranian hostage crisis. Most of these factors were geopolitical. 

Even today gold has been hovering around the geo political uncertainties. In fact during 1980 it as just geo political tension but today its lots more. Terrorism along with financial uncertainties have had a great impact on gold prices.

The key driver of the gold price at the moment is perceived to be the relative strength of the US dollar, yet the US dollar is only stronger compared to the other main currencies because these currencies, such as the Euro, are weak due to their economies remaining weak and their money supplies having been debased.

Gold is falling on concerns over strengthening US economy and the stronger dollar. Dollar gained ahead of the data to be released next week which includes the monthly employment numbers that the Fed will be watching. Currently it appears that while the rest of the world is in the doldrums, The US economy is performing comparatively well. The Dollar index hit a high of 85.68 and closed at 85.64 for the week on strong economic data from the US.

U.S. economy has grown in fastest pace in 2 and a half years in the second quarter. The Commerce department raised its estimate of growth in gross domestic product to a 4.6% annual rate from the 4.2% pace reported last month.

During the week, gold traded near the lowest level in almost nine months as the dollar rose to a four-year high amid prospects of higher borrowing costs as the U.S economy improves. 

Though September is considered as one the best performing months for gold, this year the yellow metal has declined 5.3 percent in this month itself. After dropping to $1207.04 on September 25, it has touched the lowest level since 2nd January. 

Gold prices continued their downhill ride to touch a low of $1,207/ounce last week. However, they bounced from that point and closed the week at $1,218/ounce, up from $1,215.7/ounce in the previous week. The fear of gold  miners cutting down on production if prices plunge below $1,200 is holding prices. The cost of production of major gold miners is about $1,350/ounce now, according to estimates of analysts.

Despite the news of US-led strikes against militants in Syria, gold prices didn't move up much as expected as metal continues to loose its safe haven appeal to investors. The US SPDR Gold Trust, the largest gold-backed exchange-traded fund, saw its holdings are at 772.25 tonnes on Friday - the lowest since December 2008.

Gold is also heading towards its first quarterly loss this year as strong data coming from US has made the metal weak. Data last week showed the world’s largest economy grew the most since 2011 in the second quarter. Consumer spending accounts for about 70 percent of gross domestic product. In the US, data showed that sale of new homes surged in August and hit its highest level in more than six years. Also, the final estimate of the second quarter (April-June) GDP that was released on Friday showed that the US economy expanded by 4.6 per cent.

Hence I still feel that The dollar remains the driver of gold direction.

Though geopolitical worries may not give that push or support to gold prices, there are chances that gold may witnessed recovery and not fall significantly from current levels. 

with the mining costs of most gold producers at $1,330-1,350/ounce, they can shut mines and stop new explorations. In such a case, supply will fall and curtail prices from slipping lower.

Moreover, if the dollar continues to rally, there may soon come a point when it will turn a concern for exporters in the country.

Demand has always been a supportive factor for Gold prices and it shall continue to do so in the near future:

World's largest bullion consumer- China- has been importing more gold in September than in the previous month due to demand from retailers who are stocking up gold for the upcoming National Day Holiday. From 1st October, Chinese markets will closed for a week and during this period retail sales are expected to rise. Data on Thursday showed that China's net gold imports from Hong Kong rose in August from a three year low in July. Moreover, imports are expected to remain high due to seasonal demand

Apart from this , one interesting trend that we witnessed was the rising demand for gold from India. After nearly 5 months, we saw some positive news coming from the bullion markets in India as buyers appear to be taking advantage of the relatively low gold prices. Gold demand has picked up across the country, according to traders, despite it being the `shradh' period, which many in India consider inauspicious for buying not just gold, but even other commodities such as cars, there has been some buying reported across retail outlets. As we all know that active market players usually buy at dips. But this time apart from the market player we also saw retail demand for gold rising. 

Russia added to its Gold holdings for a fifth month in a row in August, while Kazakhstan raised its holdings by nearly 800,000 ounces, data from the International Monetary Fund showed on Thursday.

Summing it up, I would like to say that the Middle East is a powder keg that seems likely to explode. The U.S. and western nations have taken a hard stance against an increasingly powerful Russia. This is effecting an already fragile Euro zone and other economies.

Gold has protected wealth throughout history from financial crises and war. We believe it will continue to do so in the coming years.

TRADE RANGE:

METAL	INTERNATIONAL price	DOMESTIC price
GOLD	$1206- $1237 an ounce	Rs.26,000-Rs.27,500 per 10 gm
SILVER	$17.15- $18.00 an ounce	Rs. 38,500 - Rs. 40,000 per kg

The primary purpose of this article by Mr. Prithviraj Kothari is to educate the masses of the current happenings in the Bullion world.

- Previous blog -

"Investors losing interest in gold over interest rate rise"

http://riddisiddhibullionsltd.blogspot.in/2014/09/investors-losing-interest-in-gold-over.html