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Monday, 5 February 2018

Where is Gold Heading To

AN upbeat U.S data and a strong dollar played key roles to pull down gold prices during the week. A lot was expected to happen over the number of data releases-

US employment report, ahead of that there is
Data on Spanish unemployment,
UK construction PMI
EU PPI
Italian CPI
US data on factory orders
University of Michigan consumer sentiment
Inflation expectation.

Of these, markets remained focussed on U.S nonfarm payrolls data and gold seemed to be behaving reacting to this influential factor


An expectation of strong economic number coming in from US strengthened the dollar. Spot gold was down 0.3 percent at $1,345.22 an ounce as the dollar ticked up against the euro ahead of hotly anticipated U.S. non-farm payrolls data, which would further give fresh clues on the outlook for U.S. interest rates.

Stronger than expected numbers could shore up expectations for the Federal Reserve to press ahead with interest rates hikes this year thus increasing the opportunity cost of holding non-yielding bullion

The dollar rose 0.2 percent against the single currency in early trade, though it remained on track for a seventh straight weekly loss. Its early signs of strength pressured gold, which is priced in the U.S. unit. Once data was out, gold didn’t show that great reverse effect as expected.

 Gold ended the week little changed, after rising in six out of the last seven weeks and hitting its highest in 17 months last week at $1,366.07.

 Data released was as follows -   

Nonfarm payrolls and unemployment rate- non-farm payrolls grew by 200,000 in January and the unemployment rate was 4.1 percent, while wages saw their biggest jump since the end of the Great Recession, the Bureau of Labour Statistics said in a closely watched report Friday.

Hourly Earnings- More importantly, average hourly earnings increased 2.9 percent on an annualized basis, the best gain since the early days of the recovery in 2009. In addition to the solid payroll growth, average hourly earnings were up 0.3 percent for the month, matching estimates and reflecting an annualized gain of 2.9 percent. That was the best since mid-2009 as the two-year economic slump was coming to a close. However, the average work week fell two-tenths to 34.3 hours.

Within the jobs report, Wall Street and policymakers are watching wage numbers closely. While job gains have been solid and consistent, salary growth has been elusive. This report could change the narrative and might push the Fed to get more aggressive with interest rate hikes.

The Fed held interest rates unchanged after its latest policy meeting this week but raised its inflation outlook and flagged "further gradual" rate increases.           
 
During the December meeting, the Federal Reserve said that it expects that economic conditions “warrant gradual increases,” in the federal funds rate, and added that inflation declined in 2017 and was running below 2%.

Should the Federal Reserve reaffirm expectations for three rates hikes, bond yields could surge.
Some market participants warned, however, that the yellow metal may face a period of weakness as physical gold demand is expected to decline as seasonality is starting to fade ahead of the Chinese New Year.

With many other asset classes already at record price levels, there is a risk of corrections either while geopolitical developments unfold or as inflation and interest rates rise to the extent that investors take profits. Investors may well see gold as offering a relatively cheap safe haven while corrections unfold in other markets

Now gold has already broken above its 2017 high of $1357, as we had expected, before retreating over the past few days. It has now taken out some short-term support levels in the process, but the key support levels such as $1335 and $1325 are still intact, so the long-term technical bullish outlook remains in place for the time being. If we are going to see new highs for the year in the coming days, then gold will have to break back above those short-term broken levels, which are now acting as resistance. Among these, $1344/45 is an interesting level to watch today. If there’s acceptance above it then don’t be surprised to see gold go back above $1357 – the 2017 high – soon. And if gold were to get back to these levels then it would increase the probability of it reaching for liquidity that is resting above the 2016 high of $1375 next. On the flip side, if $1335 gives way first, then one will have to consider the bearish argument, more so if it also goes below $1325.



Thursday, 1 February 2018

Is gold no longer being affected by a Rate Hike

Fed rate hike pulls down gold prices: No more an implied reaction for the yellow metal.
Though gold prices were flat in Wednesday ahead of the Fed meet, it managed to close higher. Initially gold prices dipped slightly after the U.S. Federal Reserve said it would keep interest rates the same, but expected inflation to rise this year.

On Fed Chair Janet Yellen’s last policy meeting as head of the central bank, the Fed left interest rates unchanged. But its message on inflation signaled it was on track to raise borrowing costs in March under incoming chief Jerome Powell.


History has shown that worries over inflation results in a rise in gold prices, which is seen as a safe haven asset against rising prices. But expectations that the Fed will raise interest rates to fight inflation make gold less attractive because it does not pay interest.

Moreover, stronger dollar pressures commodities priced in the currency, making them more expensive for buyers using other currencies. And this was exactly what happened on Wednesday.
The U.S. dollar turned positive after the Fed statement thus resulting in a dip in gold prices. But the effect wasn’t that severe as there were no significant announcements apart from just a hawking tint in the statement released by the Fed.

With many other asset classes already at record price levels, there is a risk of corrections either while geopolitical developments unfold or as inflation and interest rates rise to the extent that investors take profits. Investors may well see gold as offering a relatively cheap safe haven while corrections unfold in other markets.

What the market now await is two more rate hiked in 2018 , which if executed will pull down gold prices significantly.Till then we find gold in a comfortable zone, not paying much heed or reaction to a single rate hike.