By Mr. Prithviraj Kothari, MD, RSBL
Recently, gold is being pulled apart
by two significant forces. On one side where the escalating tensions in the
Middle East are igniting gold prices a December rate hike is pulling them
down on the other side.
Off late, there has been some
excitement regarding gold as tensions escalate in Middle East. Turkey had
downed a Russian Military Jet, accusing violation of air space, which Russia
denied. Russia warned Turkey over serious retaliation and now sending an
advanced air defense system to protect its air crafts. NATO members are
scratching their heads over how Russia might retaliate.
Gold made some gains overnight on a
slight softening in the dollar and heightened geopolitical tensions after
Turkey shot down a Russian warplane but these proved short-lived.
Gold prices edged lower on Wednesday
morning in London on growing expectations of a December interest-rate rise by
the US Federal Reserve, which continued to weigh on sentiment.
The spot gold price traded at
$1,073.70/1,074 per ounce, down $1.50 on Tuesday’s close.
Markets were focused on the economic
data that was released in the US ahead of the Thanksgiving holidays on
Thursday. The reports included the core durable goods orders, unemployment
claims, the core PCE price index, durable goods orders, personal spending and
new home sales.
In spite of the release of these
reports, market volatility had been low on Thursday due to Thanksgiving holiday
in the US.
The metal is trading at its lowest
levels since February 2010 as investors weigh the prospects of higher US
interest rates after data pointed to a strengthening economy. With gold
typically seen as a haven asset, demand for the metal is falling on the
prospect of higher returns in US securities.
Moreover gold will lose its appeal
post a rate hike. Raising rates “increases the opportunity cost of holding
gold. Gold has zero yields — it actually costs you money to hold it — so
there’s more incentive to put your money into a yield-earning dollar
investment and hence the demand for gold will decline.
Currently market participants
currently see a 78 percent chance of a US rate lift-off by year-end, according
to the CME Group Fed Watch – a tool to gauge the market’s view of an interest
rate hike.
If the rate hike expectations are met, the US dollar
is likely to gain further. Gold tends to move inversely to the
greenback. A stronger dollar pressures all commodities since it makes them more
expensive in other currencies, plus some investors are less likely to buy gold
as an alternative currency when the greenback is muscular.
Thanksgiving may be over in the
U.S., but traders will still have a full plate next week.
Fed Meeting- The US Federal Reserve
will meet on December 15-16 to decide if will lift interest rates from
near-zero levels for the first time in almost a decade.
Moreover, markers will watch Yellen’s comments to see if she
offers any further clues on what to expect in the way of monetary policy when
the Federal Open Market Committee meets. Yellen is
scheduled to appear before the Economic Club of Washington on Wednesday.
Major reports- Other major U.S.
reports next week include :-
- The Chicago Purchasing Managers Index on Monday
- Institute for Supply Management manufacturing PMI Tuesday
- The ADP private-sector jobs and Fed Beige Book report Wednesday
- Non-manufacturing
index and weekly jobless claims on Thursday.
The
robustness of the November employemnt report may put the final nail in the rate raise coffin, one
way or another. Employment will have to be very weak for the Fed not to go
ahead with rate liftoff.
ECB- the European Central Bank will
meet next Thursday and expectations are for it to expand its asset purchase
program and cutting its deposit rate. ECB will announce further loosening of
monetary policy while the Fed starts tightening. The ECB holds a
monetary-policy meeting. Expectations have been growing for the central bank to
increase its asset-purchase program known as quantitative easing, particularly
after ECB President Mario Draghi said last week that “we will do what we must”
to raise inflation to an acceptable level.
ECB monetary policy and US NFP
report for November scheduled next week is happening close to a key support
area and is very critical for gold. As a result, traders will be on the lookout for the November report next
Friday.
The primary purpose of this blog by
Prithviraj Kothari - MD, RSBL, is to educate the masses of the current happenings
in the Bullion world.
