Upcoming Fed Meet Important For Gold

Last week gold was into a wave-like movement where it crossed the $1500 mark but was pulled down back to $1497 over-optimistic global news.

Gold gained ground during European trading hours on Friday. It then gave up some of those gains early in the U.S. trading session. Gold demand in Europe has been strong in the wake of the ECB’s decision to lower rates and re-launch its sovereign debt-buying program.

Gold prices were range-bound on Friday as monetary easing uncertainties by major central banks supported demand while trade talk optimism lifted other assets, curbing gold’s gains.

The gold prices were on a rise in Europe on Mario Draghi’s loosening moves at the ECB, but was not allowed to stay above the $1,500 level it regained there (indeed it rose to above $1,520 at one stage) and was taken down to $1,498 by the market close in the U.S.  The fall seems to have been due to renewed optimism on some kind of trade talks agreement with China is on the cards after news from, later denied by, the Trump Administration that the U.S. might go easier on tariffs on Chinese imports.

De-escalation of the tensions between the world’s two largest economies (the United States and China) have led investors to take out the money from the safe-haven asset gold and move towards risk assets.

U.S. President Donald Trump said on Thursday he preferred a comprehensive trade deal with China but did not rule out the possibility of an interim pact, even as he said an “easy” agreement would not be possible.

US President Donald Trump hinted at the possibility of signing an interim pact with China in the meantime until a comprehensive trade agreement can be worked out. These comments added to the recent optimism in the markets surrounding the trade war, shortly after both sides put off additional tariff hikes on each other’s imports.

Even though there was positive news that came in from the US, investors still believe that gold prices are here to stay and will be stronger with time as they fear that some sort of global slowdown is yet to come.

Some key indicators are pointing toward an economic slowdown:

• Despite low official unemployment numbers across the board, jobs growth has slowed to its weakest pace since 2011.
• Despite getting a boost from the Trump tax cuts, corporate earnings growth is now decelerating.
• Copper and other economically sensitive industrial metals are showing relative weakness.
• The Treasury yield curve recently inverted.
• As a result of trade disputes between the U.S. and China, manufacturing activity has slumped to a multi-year low.
• GDP itself it’s slowing. U.S. gross domestic product in the second quarter came in at 2% growth (down from 3% earlier in the year) – it's second-worst showing since President Donald Trump took office.

With fears of a global recession growing, analysts are starting to speculate that central bankers will cut interest rates further in the near future. They usually cut interest rates when growth is slowing in a bid to stimulate demand and then increase rates when the economy is growing in an attempt to control inflation. 

The problem is, since the financial crisis, central banks have been cutting rates aggressively. But these actions have not stimulated demand as expected. The situation has got so bad that some central banks around the world are imposing negative interest rates, which means consumers have to pay to keep their money in the bank. 

The financial world has never before seen such a strange setup, and this is why many analysts are recommending investors buy gold. 

With the resumption of trade talks between the U.S. and China not due until next month, and any seriously peace-making outcome uncertain anyway in our view, we suspect that gold will see another boost.  U.S. financial data is conflicting, but the feebleness of the global economy may well see the Fed taking vigilant measures, including further rate reductions, to try and insulate the U.S. from a global depression.

News that shook the markets on Monday was the attack in Saudi Arabia. Reacting to it, Gold prices jumped 1% on Monday as attacks on Saudi Arabia’s oil facilities dented risk appetite, boosting demand for the safe-haven bullion, while investors waited for clues on monetary easing from major central bank meetings due this week.

The gold price does seem to be under pressure to rise and eventually we do see this thrust driving prices upwards. Much may depend in the short term, though, on the outcome of next week’s FOMC meeting, and the interpretation of the various statements from Jerome Powell. Will the Fed lower interest rates again and, if so, are there further likely reductions ahead this year?

As per our Managing Director, Prithviraj Kothari thinks that the next major wave of move in gold prices will be governed by the outcome of the upcoming Fed meeting.

Rally in Gold Prices to Continue

When gold prices rally and bullish sentiments kick-off, the entire market gets into the bandwagon of new highs. We see analysts quoting new highs for gold. Some say $1600, some $1750 and there are some who also believe that it will cross $2000 by the end of 2019.

Well, there are many reasons that support the current and future rally in gold prices and justify the bullish sentiments.

2017 and 2018 were one of the worst-performing years for gold and many had even written off the yellow metal.  Prices for the metal have moved between $1100 and $1300 an ounce for most of the last five years. But the lacklustre price movement is all over now.

Gold was being laughed at. But now, not many are laughing, as the spot price has broken out to six-year highs, and investors late to the party have been bidding up the top companies in the sector to 52-week highs. One thing is for sure: the gold trade is on, and it makes sense to add it to your portfolio now if you haven’t yet considered it.

But yes we cannot ignore the fact that it is becoming increasingly challenging for the market participants to anticipate and plan for the future. In this environment of rising uncertainty and falling opportunity costs of holding gold, the yellow metal stands out as a clean way to take a strategic position both for institutional investors as well as the official sector [meaning central banks]

The bullion bounce surge, which has taken off this month, will continue to be propelled by mounting investor worries.

Increased uncertainty across the globe will act as the catalyst for the recent and likely continued increase in the value of the yellow metal.

One more aspect that cannot be ignored is the Treasury yields. As Treasury yields continue to skydive, gold price levels could go through the roof as the scrambler for safe-haven assets continues amid the latest market volatility as trade wars between the U.S. and China rage on. This could provide more gains for gold-focused exchange-traded funds (ETFs) as analysts are predicting that the precious metal could shoot past the $2,000 per ounce price mark.

Where on one side there is so much happening in the US, on the other side we see China going equally active.

China has long been aiming to reduce its dependency on the US dollar. In an effort to reduce its exposure to gold it has been piling its reserves. For any country to diversify from the US dollar, it’s very important to purchase the yellow metal even in smaller quantities. This will help in meeting its objectives.

But China’s gold purchases, along with the buying spree in other countries, including Russia, also aim toward a broader geopolitical objective. They want to undermine dollar hegemony and reduce the United States’ ability to weaponize the dollar as a foreign policy tool.

As the Chinese buy gold, they have also been divesting themselves of US Treasury’s. China dumped Treasuries for the third straight month in May, pushing their holdings to the lowest level in two years. Data for June should be released in the next few days.

This move toward de-dollarization in China and other countries could boost the price of gold.

The recent increase in gold prices may be set to continue on the strength of a global push for de-dollarization.

Countries increasingly hostile to the US and dollar hegemony, such as Russia and China, are searching for alternatives to the dollar including gold.

China has severely restricted imports of gold since May in a move that could be aimed at curbing outflows of dollars and bolstering its Yuan currency as economic growth slows, Reuter’s reports.

The world’s second-largest economy has cut shipments by some 300-500 tons compared with last year – worth US$15-25 billion at current prices, the news agency said, citing bullion industry sources with direct knowledge of the matter who spoke on condition of anonymity because they are not authorized to speak to the media.

The restrictions come as an escalating trade confrontation with the United States has dragged China’s pace of growth to the slowest in nearly three decades and pressured the Yuan to its lowest since 2008.

A strongly heading trade war fuelled with a weak US economy will further push gold prices high.

Larry Kudlow, the American financial analyst said on Sunday that the US economy is heading for a recession. But he also mentioned that the recent US-China telephonic talks have produced positive news.
Last week’s desperation from Trump on China and for FED interest rate cut says it all. Summing it up, this time, China is taking an upper hand of trade talks, while the US will be on the receiving hand.


Monday, the 19th, we don’t have any data news coming in from the US and the markets are more or less reacting to the Hong King Protest news and an expectation of a stimulus from China.

All in all, Our Managing Director Prithviraj Kothari believes Gold is set to gain as recession, trade and geopolitical risks rise, and yields fall.