By Mr. Prithviraj Kothari, MD, RSBL
As we all know, lately gold has been
majorly influenced by any data released from the Fed regarding its interest
rate.
Gold prices dropped in Asia on Thursday as China markets returned from
holidays and investors stake positions ahead of Fed minutes later in the day.
Trading activity had become more
muted as the September Federal Open Market Committee (FOMC) meeting minutes
approached.
Investors awaited the release of the minutes from the Fed's September meeting
on Thursday for further hints on whether the U.S. central bank could raise
short-term interest rates before the end of the year.
Now majority of the market players believe that rate hike won’t come in before March 2016.
Gold prices climbed on Friday morning after
the release of minutes of the Federal Reserve’s September meeting raised
speculation that the US central bank could wait until next year before
tightening monetary policy.
Spot gold was last at
$1,154/1,154.40 per ounce, up $14.40 on Thursday’s close. Trade has ranged from
$1,139.50 to $1,154.60 so far.
The shifting expectations are helping to weaken the U.S. dollar and in turn boosting gold prices. Early in Friday’s session, December gold futures ended up hitting their highest prices since late August and are preparing to end with gains of almost 2% for the week. As of 12:40 p.m. EDT, December gold last traded at $1,158.70 an ounce.
One of the main reasons, apart from soft data, that has delayed the rate hike is the limo inflation in the US. It has prevented the central bank for raising rates from near-zero levels, where they have been since December 2008.
The FOMC decision not raise the
federal funds rate has led a majority of market participants to look at 2016
for a normalization of US monetary policy.
To state the exact month would be
quite difficult but it could be around March or June 2016.
The Fed has been locked in an
intense debate over the timing of a rate hike with sagging inflation impeding a
launch-off.
Interest rates have been at
near-zero levels since December 2008 and haven’t increased since 2006.
The other data released along were-
- Weekly unemployment claims came in at 263,000, besting the forecast by 9,000 and under the psychological 300,000 mark.
- September import prices month-over-month fell 0.1 percent, beating the forecast of -0.5 percent
- Wholesale inventories month-over-month were in-line with projections at 0.1 percent
The FOMC minutes elaborated on its concerns
about global markets, particularly the Chinese slowdown.
The September minutes released by
the FOMC Thursday evening suggested that policymakers are unlikely to rush to
tighten rates amid concerns over a China-led global economic slowdown.
The minutes stated that although US
economic data releases generally met market expectations, domestic financial
conditions tightened modestly as concerns about prospects for global economic
growth, centered on China, prompted an increase in financial market volatility
and a deterioration in risk sentiment during the intermeeting period.
Chinese markets reopened after a prolonged
holiday as US trading session was the final one before a holiday weekend.
The minutes further stated that although
US economic data releases generally met market expectations, domestic financial
conditions tightened modestly as concerns about prospects for global economic
growth, centered on China, prompted an increase in financial market volatility
and a deterioration in risk sentiment during the intermeeting period.
Weak data sees gold prices to be in the
positive territory. Moreover, in the Indian markets we see demand for gold to
move high as the markets welcome one of the main gold buying festivals- Dussehra and
Diwali.
On the contrary gold prices could
move lower next week term as markets have priced in renewed geopolitical
turmoil in the Middle East.
Most analysts, though, are bullish on gold as the market is seeing a technical shift. Many expect to see prices retest the August highs at $1,170 an ounce and the 200-day moving average at $1,178.20 an ounce.
Though gold prices are likely to move higher, a stronger equity market could take some momentum away from gold.
When the Fed does start raising rates, something it has not done in nine years, it will eventually mean higher rates for consumer and business borrowers. But Fed officials, including Chair Janet Yellen, have stressed that the rate increases will likely be very gradual, meaning that rates would still remain near historic lows for a while.
