Dollar dependency reduces. Benefits gold

Why is gold being reconsidered as a mode of investment globally? Why is the dollar dependency reducing? Why are central banks world over piling up their gold reserves?

Well the answer to this looks simple but the reasons behind it are quite complex.

There are so many things happening in the international markets. Gone are the days where just The U.S. economy played an important role in influencing world market. Today there are many other factors that are responsible for the movement of equities, commodities and other markets.

This week too, while the dollar strengthened against the British Pound, gold premium eased in China. Where we saw weakening imports of gold in China on one hand, on the other bullion reserves rose in Russia.

Dollar against the pound - The British Pound was the worst-performing, adding to losses after the UK Parliament was unable to reach a consensus for an alternative Brexit strategy.

Arguably the best-performing major on Thursday was the US Dollar, which climbed alongside rising front-end government bond yields. This is despite a flurry of disappointing domestic economic news flow. US GDP missed expectations, clocking in at 2.2% q/q in the fourth quarter of 2018 against 2.3% anticipated and from 3.4% in Q3.

The U.S. dollar benefited Friday from sterling’s slide after parliament for the third time rejected Prime Minister Theresa May’s proposed deal to pull Britain out of the European Union.

The pound fell as much as half a percent to the day’s low of $1.2976. Sterling’s move led the dollar index higher, last up 0.07 percent to 97.274, helping it recover from an earlier drop on the weaker-than-expected report of U.S. inflation data, which added to the conviction that the country’s economy is losing momentum.

U.S. economic numbers - U.S. consumer spending barely rose in January and income increased modestly in February. The report from the Commerce Department also showed price pressures muted in January, with a measure of overall inflation posting its smallest annual increase in nearly 2-1/2 years. Consumer spending accounts for more than two-thirds of American economic activity.
With growth slower and inflation benign, Friday’s data bolstered the Fed’s case for ending its three-year monetary tightening campaign.

Spot gold was up 0.7 percent at $1,298.80 per ounce by the end of the week, testing resistance at the key $1,300 level.

Bullion was also set to notch up about a 1.2 percent gain for the quarter, helped mainly by a dovish U.S. Federal Reserve and concerns about the global economy.

However, gold was still bound for a second consecutive monthly drop, losing about 1 percent, which would be its biggest decline since August last year. The metal fell by about 1.5 percent on Thursday, the most in more than seven months.

Premium - Gold premiums in China eased in the past week as worries about a slowdown in the world’s top bullion consumer prompted some customers to hold off on purchases, while a price dip buoyed appetite in other Asian hubs.

In China, premiums of about $12-14 an ounce were being charged over global benchmark prices, a slight reduction from last week when they rose to the highest since March 2017 at $14-$16.
The country’s net gold imports in February via main conduit Hong Kong fell 13.6 percent from the previous month.

Gold Reserves - Central bank buying has helped support gold prices in recent years. Bullion has risen 20% since the start of 2016.

Within the span of a decade, Russia quadrupled its bullion reserves and 2018 marked the most ambitious year yet. And the pace is keeping up so far this year. Data from the central bank show that holdings rose by one-million ounces in February, the most since November.

The data shows that Russia is making rapid progress in its effort to reduce its dependency on the US dollar and to diversify away from American assets. Analysts, who have coined the term de-dollarization, speculate about the global economic impacts if more countries adopt a similar philosophy and what it could mean for the dollar’s desirability compared with other assets, such as gold or the Chinese Yuan.

For Russia, experts are starting to question whether it can afford to keep up its intense pace of buying. Some say the country will import more gold to guard against geopolitical shocks and the threat of tougher US sanctions as relations between the two powers continue to deteriorate. Gold buying last year exceeded mine supply for the first time. Still, others argue that Russia’s bullion demand is set to slow.

But it’s not single handed Russia that’s piling its reserves. Given the constant geopolitical unrest, more and more banks are shifting focus to the yellow metal, which leads us to conclude that gold prices are soon to rise further.

Fed puts the dollar in red

Gold is traditionally used to hedge against economic uncertainty. As sanctions fall into place and the screws tighten on other nations, the U.S. dollar loses power within the world economy.

Where 2011 gold saw its life time high at 1917.90, in 2015 it bottomed at $1047. That was followed by a 31% rally to $1375 in July 2016, since when gold has established a triangular consolidation pattern. Last August, the price sold off to $1160, becoming oversold to record levels. That established the second point of a rising trend, marked by the lower solid line.

As 2019 started, gold was seen on a positive note. Gold has rallied and established support at $1280-$1305. And it is expected to move further from here.

Last week, Precious metals surged upward in Asia-Pacific trading, building on gains from Wednesday following a dovish construed U.S. Federal Open Market Committee. 
Gold has been as high as $1,319.80.

While the dollar saw some respite from the late New York declines, precious metals continued to firm as participants considered the implications of the Fed’s growth projections.
Gold saw the $1,310 pivot level remain intact, while seeing a generally orderly ascent throughout the session toward $1,320.

Global markets look deteriorating in the new future. Hence we will see a rise in government borrowing in the deficit countries. Dependency on dollar denominated assets will reduce.
Once again Gold has established itself as an asset with great safe haven appeal. It has become the investor’s favourite due to many reasons and is expected to do so in the near future too.

Reasons being -

Global economies - wave of monetary inflation suggest that the dollar-based financial order is coming to an end. But with few exceptions, investors own nothing but fiat-currency dependent investments. The only portfolio protection from these potential dangers is to embrace sound money - gold. And hence demand for the yellow metal will rise resulting in an increase in its prices.

Dovish comments from FED - Some speculators appear to have gambled badly on the likely content of U.S. Fed chair, Jerome Powell’s latest statement following Federal Open Market Committee (FOMC) meeting.  Ahead of the statement the gold price dipped back under $1,300, albeit briefly, for the first time in several days.  But following the release of Powell’s statement it surged higher hitting the $1,320 level very briefly for the first time in just over 3 weeks.

Monetary policies - The global economy is at a cross-road, with international trade stalling and undermining domestic economies. Some central banks, notably the European Central Bank, the Bank of Japan and the Bank of England were still reflating their economies by suppressing interest rates, and the ECB had only stopped quantitative easing in December. The Fed and the Peoples’ Bank of China had been tightening in 2018. The PBOC quickly went into stimulation mode in November, and the Fed has put monetary tightening and interest rates on hold, pending further developments.

Central bank buying - Russia is not alone in seeking to diversify out of U.S. debt holdings and transfer wealth into precious metals. As Per the World Gold Reserve, Gross purchases of 48 tonnes (t) and gross sales of 13t led to global gold reserves rising by 35 tonnes on a net basis in January, with sizable increases from nine central banks. This is the largest January increase in gold reserves in our records (back to 2002) and illustrates the recent strength in gold accumulation.

The primary factor cited in gold purchases seems to be global economic uncertainty. If sanctions grow tighter and more numerous, the global economy will continue to shutter. The stage is ready for gold transfers in the hundreds of tons this year, with several countries building growing gold stockpiles.

Rate hike - The latest statement was interpreted as predicting no further Fed interest rate increases this calendar year and perhaps only one rate rise next year.  It was further interpreted to suggest no rate rise in 2021, but that is, in reality, too far ahead for this position not to be materially altered one way or the other at a later meeting. A delay in a possible rate hike has compelled gold to move higher. And if it continues to do so till 20121, as expected by many market players, then we will gold reach new level highs in a few years. Bur back to Powell’s post-FOMC meeting statement.  There wasn’t anything too surprising in it – or at least there shouldn’t have been – as it largely confirmed what most economic analysts had been predicting regarding Fed tightening over the next several months.  But then perhaps the aforementioned analysts needed semi-official confirmation of their assumptions.

Inasmuch as worries about Fed rate rises had been instrumental in keeping the gold price restrained over the past two to three years, the prospect of the Fed backtracking should be positive for gold and negative for the dollar were it not for a similar, or worse, downturn in the global economy.  This may keep the dollar stronger than the Fed, or President Trump, would like.  That correlation would tend to boost imports and hinder exports, thus exacerbating America’s already dire current account deficit and countering any positive effect from the Trump tariff impositions.