Gold’s Near Term Looks Mixed

The gold market looks a little chaotic as prices have been unable to break resistance at $1,800, discerning a lot of gold dealers in India. At the same time, sentiment among retail investors and Wall Street analysts shows no clear direction in the upcoming term, concerning even the largest bullion dealers in India. Investor sentiments have been relatively volatile in the last few months. Even though gold stabilized after last week's flash crash, it failed to breach the $1,800 an ounce level. A very keen eye is being kept on the delta variant, Afghanistan headlines, and the Federal Reserve's tapering signals at the upcoming Jackson Hole meeting.

Even though gold was quick to stabilize above the $1,700 an ounce following a flash crash last week, there is not enough interest in gold to keep prices trending higher, and gold failed to breach the $1,800 an ounce level. This puts it at risk of another significant selloff. Apart from this, more reasons can be cited as being responsible for gold's behaviour -

• Chinese Economy - The moves came against the backdrop of a jump in Chinese equity markets – after President Xi Jinping hinted at more stimulus measures to support the economy in an editorial over the weekend. The stronger tone in stocks capped gains in gold keeping the virus concerns aside.

• ECB - Finance ministers from the eurozone are due to discuss a document that could lead to the relaxation of fiscal rules that are governing the bloc. This will allow more room for fiscal stimulus and reducing the risk of further rate cuts from the European Central Bank. Given that the ECB’s negative rates are a significant pillar for European portfolio gold purchases, any clear commitment to fiscal easing could be marginally negative for gold. On the flip side, the Afghan chaos is unravelling with the US President Biden saying that the worst still awaits from Afghan. Biden is being criticized for his Afghan withdrawal as his nationals and citizens of many other countries could not get out of the country. All these odds are helping gold to sustain $1775-$1780 the whole of the last week.

The market tilt is slightly negative with the close under pivot. The near term upside target is $1795.30. The next area of resistance is around $1789.5 and $1795.30.

The main event next week is the Jackson Hole symposium. The headline discussion will be 'Macroeconomic Policy in an Uneven Economy,' but the focus will be on bullion markets in India. The discussions will surround what appears to be an impending tapering of the Fed's QE asset purchase program and low-profile US economic data flow before Jackson Hole comment on Fed’s Powell on August 26. The U.S Delta variant is also another rising factor that is impacting consumer sentiments. This will result in gold taking on haven while we reiterate crossing 1802 -1805$ this week.

Gold's near-term outlook looks mixed because the Federal Reserve has indicated tapering. If they continue to reiterate that view, it will weigh on gold as we could see the dollar strengthening and a rally in yield. We do have a two-sided market at the moment. One side is that the dollar is relatively strong of late due to the expectation that the Fed will move towards tapering, based on the recent commentary. Another side is that we still believe there is underlying support in the gold market right now. We are starting to see some drags from Delta on the global economic recovery. 

Tremendous Support For Economies And Gold

It’s been exactly a year since gold peaked at $2070 amid Covid concerns. And a year later, we are witnessing the gold prices crashing down. Initially, gold prices were capped by bullion banks capitalising on print taking after a sharp rise from March 2020. But currently, gold smashed lower in Asia Pacific trading, in a relatively quick drop from $1,750 to $1,677 as sellers continue the post-NFP momentum to this week.

RSBL gold slipped to an over four-month low on Monday as solid U.S. jobs data fueled concerns of a sooner-than-expected interest rate hike, which could increase the opportunity cost of holding non-interest bearing bullion. By putting things together, we can get a clear idea behind this sharp fall in gold.

• S Jobs report - The first being, as mentioned, that the selling momentum picked up after Friday's strong US jobs report. Gold had been consolidating since mid-July prior to the key risk event before finding fresh momentum to firmly breakaway below $1,800. Data from the U.S. Labour Department showed employers hired the most workers in nearly a year in July and continued to raise wages. That underscored remarks by Fed officials suggested a sooner than anticipated roll-back of pandemic era stimulus on the back of a solid labour market recovery.

  The US non-farm payrolls printed a strong 943000 non-farm job additions in the US during the month of July, stronger than the 870000 jobs as expected by the analysts and 850000 that was printed a month earlier. The latest data helped cement the thinking that the Federal Reserve (Fed) is moving towards the ‘substantial’ progress that it is looking for to start easing the bond purchases.

• Yields - As a result of a stronger than expected jobs report, the US 10-year yield jumped above the 1.30% mark after the data release and is now set to recover towards the 2% threshold to the end of the year. When we closely observe the commodities markets, we get to understand that any prospect of higher yields is a threat to gold. RSBL Gold is not doing well, and Friday’s strong US jobs figures have come as a slap on gold’s face. Moving forward, higher US yields will continue increasing the opportunity cost of holding the non-interest bearing gold, which didn’t even fully benefit from the overshooting inflation and the ultra-low US yields recently, thus resulting in a further sell-off.

• Stock Markets - Asian stock markets kicked off the week on a positive note, although the US indices had nothing more exciting than mixed performance after the announcement of strong jobs data on Friday. The US jobs data gave a small boost to the Dow and the S&P 500 which closed Friday’s session 0.41% and 0.17% higher respectively. Even though the strong economic data and prospects of a tighter US policy are better for value stocks, the rising Covid cases should keep the tech stocks in demand, regardless of a tighter Fed policy. However, the tech giants can expect a boost in prices.

• Vaccination - One of the reasons why gold dealers in Mumbai crashed from its peak was the worldwide vaccination drive. There is a general belief that the vaccination and the introduction of the vaccination certificate will prevent businesses from going through strict lockdown measures again. The ‘certificate’ setup will allow them to stay open instead and continue functioning with those who can present a valid vaccination certificate. The idea is obviously to get as many people vaccinated and get out of the crisis as soon as possible. In spite of a third wave threat, economies across are opening up and gradually moving towards safety. This could also possibly be a reason for the drop in gold prices.

• Inflation - The latest update on the US consumer price inflation is due on Wednesday, and the expectation is a certain steadying in the US consumer prices near last month’s 5.4% print. China released softer-than-expected consumer prices this Monday, while producer prices advanced to 9%, as an indication that the pressure on factory-gate prices remains strong.

Gold could fall towards $1,700 in the near term, however, we are still going to see a tremendous amount of support getting pumped into the global economy, and that should still support RSBL gold.