Drivers for Gold

The past few trading days have seen the gold price hovering above and below the $1,200 mark in the light of a stronger dollar and a lack of Chinese data due to the nation’s Golden Week holiday this week.  Every time the gold price has nosed above $1,200 it has been taken down a few dollars again.
There were important key events that occurred during the week.

Let’s have a look at all that has been affecting gold - 

US Economic Data - Data on Wednesday showed that U.S. service sector activity accelerated to a 21-year high in September and another report showed that private sector hiring increased at the fastest pace in seven months in September.

US Dollar - Gold prices inched down on Thursday as the dollar strengthened on positive U.S. economic data. Rising U.S. Treasury yields were also cited as headwind for the precious metal.
The dollar hit an 11-month high against the yen and stood tall against other its peers on Thursday, boosted by a spike in Treasury yields following upbeat U.S. data and comments from Federal Reserve Chairman Jerome Powell that were seen as hawkish.

Rupee at an all time low - Rupee was at an all time low of 73.34 on Wednesday, which further spikes gold prices in spite of a global down fall. Increased buying by the world’s second-biggest gold consumer would support global prices that have traded near $1,200 an ounce since late August, but also widen India’s trade deficit and add to pressure on the Indian rupee.  Rupee is consistently falling and we don’t know how much it will fall further. It is prompting investors to hedge their risk with exposure to gold.

Domestic gold prices - Gold prices crossed the Rs 32,000 per 10-gram mark on Wednesday at the bullion market as fresh buying by local jewellers ahead of the festive season pushed up prices. Positive global cues also supported the price move. Prices of the yellow metal surged by Rs 555 to reach Rs 32,030 per 10 gram.

Demand for gold - Traders in India,  said that they are building up inventory ahead of Diwali and Dhanteras next month. Also, globally sentiments for gold improved after US and Canada reached an agreement to salvage a North American free trade deal. India’s gold imports may rise in the fourth quarter as investors seek alternatives to faltering equity markets and a plunging rupee. Traditional buying will also rise during the festival season, said several sources involved in the market.

Meanwhile we expect the gold price to continue hovering around the $1,200 mark, give or take a few dollars.  There does seem to be an appetite to take it higher, but every time it does so it seems to be knocked back.

What will probably drive gold in the following few months -
• Positive or negative U.S economic data
• Any news on Chinese gold demand which will surface once the Chinese Golden Week holiday ends
• Euro zone trials
• Italian Debt Situation
• Brexit negotiations
Keeping the above events in mind, a mixed bags of reactions is expected from the markets for gold.

Gold might take time to recover

Last week, the Fed had indicated that it will pursue a tighter monetary policy. This prompted the dollar to strengthen; and it’s after effect was seen on gold. Immediately gold prices dipped.

The Fed raised U.S. interest rates last week and said it planned four more increases by the end of 2019 and another in 2020, amid steady economic growth and a strong job market.
Spot gold was down 0.5 percent at $1,186.29, as of 0748 GMT. In the previous session, gold touched it’s lowest since Aug. 17 at $1,180.34 an ounce.

Since quite some time gold has been dancing to the tunes of the dollar. Prices have remained almost dependent on the dollar and the movement has been inverse. And dollar is further dependent on the US economy which has been showing positive developments and better than expected progress.  Efforts by the Trump administration to reduce the trade deficit from an economic point of view has been friendly for the greenback as well.

Gold has fallen about 13 percent from an April high, largely because of the stronger dollar, which has been boosted by a vibrant U.S. economy and fears of a global trade war. Investors have bought the greenback instead of gold as a safe investment.

The release of the final U.S. gross domestic product for the second quarter “put downward pressure on the yellow metal. Moreover, the pace of [economic] growth was confirmed as strong in the U.S. which validated the more hawkish views within the Federal Open Market Committee (FOMC).

Last Wednesday, the Fed on lifted federal-funds rates for the third time this year, to a range between 2% and 2.25%, and signaled it was prepared to increase again in December.

The spill over effect of previous and future hikes was seen on gold at the beginning of this week too. Gold prices lowered in Monday and remised in the negative zone.

There is still a lot of downward pressure for gold before it picks momentum. The widening of interest rate differentials, and the upward trends in U.S. economic performance are weighing on gold. At least in this quarter, fundamentally it is very difficult to long gold.

But as I have mentioned in my previous blogs, is that though gold has not lived up to its safe haven image, the central banks are still piling up its reserves.

Gold, known as a "safe haven," has come to be preferred by central banks as well as individual investors since the outbreak of the global financial crisis. Central banks in the first half of this year added 193.3 tons of gold to their reserves, the highest level since 2015. With 125.8 tons of gold, Turkey was named the second country achieving the highest increase in gold reserves since early 2017.

Russia, Turkey and Kazakhstan played an important role in the purchases in question. In the first half of the year, 86 percent of total gold purchases were made by these three countries.

Rank wise standing of countries in terms of purchase of gold made-
No1. In gold - Russia
No. 2- Turkey
No.3- Kazakhstan

The reason for these piling reserves of gold is to reduce its dependency on dollar reserves. What people have understood lately that US President Donald Trump’s attitude have been disturbing global financial markets. This could worsen further. In anticipation of avoiding future problems, central banks and other countries have started increasing their gold reserves; On the other hand, the rise in geopolitical risks in the Middle East was also instrumental in increasing the demand for gold.

Furthermore future events may lead to volatility, once again a favourable zone for gold

• Trade wars
• The risk of natural disasters and
• Geo political wars
All of these might have an impact on world economies and further on gold thus raising its demand as a safe haven asset.