Long term looks favorable for Gold

Gold has fallen out of favour as investors prefer havens such as the dollar, Treasuries and yen amid fears that a looming trade war will damage global growth, hurt earnings and drag down stock markets and other risk assets. 

Gold has not fared well lately despite rising global trade tensions that have knocked down equities. Gold has been hurt by expectations for more Federal Reserve hikes complemented by a strengthening US dollar which further pulled down gold prices.

Many believe that gold has lost its shine. Each time it gets close to break the $1350 level, it fails and is unable to generate returns in a rising yield environment and the biggest obstacle for the yellow metal currently is the rally in US dollar .

Hence, precious metal’s “biggest disappointment” this year has been that it keeps failing to attract safe-haven inflows in a meaningful way.

Some even believe that gold has not bottomed out yet and there is further scope for a downfall as gold is oversold. With gold back to trading near six-month lows and prices struggling to catch a break during the past few weeks, analysts are saying that gold is failing to attract safe-haven interest due to a surging U.S. dollar.

However, given the recent equity-market correction and talk of a trade-driven slowdown in the global economy, it is likely that the market will start to get a lot less enthusiastic about aggressive Fed tightening and the US dollar. On the positive note, the interest-rate environment is becoming more favourable for gold, with inflation expectations rising — a good sign for the precious metal that has traditionally been viewed as an inflation hedge,

The Federal Reserve will probably raise interest rates two more times this year, and twice in 2019, while the European Central Bank will likely start tightening in September next year. That should shift the monetary policy divergence in favour of the euro relative to the dollar and be positive for gold in the greenback.

On top of that, lower gold prices might encourage more physical buying in key markets, including China and India.

So in the long term things look favourable for gold and the yellow metal might once again get into the safe haven mode.

Gold expected to be markets favorite soon

Last week we saw divergence in U.S and European Monetary policies. European politics too witnessed similar events. This affected gold prices and it hit a six month low as the dollar hit an 11 month high.

Gold prices are down for the second consecutive week with the precious metal off more than 0.70% to trade at 1269 ahead of the New York close on Friday.

The Federal Reserve hiked U.S. interest rates again this month, while the European Central Bank said its benchmark rates would not rise until after the summer of 2019.

Rate hike strengthened the US dollar while. Gold is trading at a six-month low in the global market.
The decline came in alongside losses in global equity markets this week as mounting geo-political tensions regarding a looming trade war continue to weigh on risk appetite.

TRADE WAR - The intensification of rhetoric between China and the U.S. has continued to weigh on market sentiment as investors weigh the impact of an all-out trade war between the world’s largest economies. While these concerns would typically be supportive for the yellow metal, expectations for higher rates and persistent strength in the US Dollar have kept prices under pressure with gold breaking to fresh yearly lows this week.

US Data - things have been quiet on the data front but look for that to change next week with U.S. Durable Goods Orders and the third and final read on 1Q GDP on tap. Highlighting the economic docket will be the May read on Core PCE (personal consumption expenditure) on Friday. Consensus estimates are calling for an uptick in the Fed’s preferred inflationary gauge to 1.9% y/y. A strong print here would likely see traders continue to price in a fourth rate-hike from the central bank this year- a scenario that would weigh on gold prices.

Gold prices edged up on Friday from six-month lows as the dollar slipped, but the modest nature of the recovery suggested speculators might still be poised to punish the metal further.

Gold tumbled last Friday after repeatedly failing to surmount the $1,300 level as speculators rushed to liquidate long positions and others put on bearish positions.

The dollar pulled back from an 11-month peak against a basket of major currencies on Friday, as the euro strengthened after a survey showed euro zone private business growth recovered in June. A weaker greenback makes dollar-denominated gold cheaper for holders of other currencies.
Now a matter of concern is that even though the dollar weakened, gold did not react much to it. Now we need to keep an eye on the movement of the yellow metal as too many powerful forces are expected to drive gold prices higher.

Geopolitical fear is the major force that is expected to exert its pressure on gold.  The crises in Syria, Iran, the South China Sea, and Venezuela are not going away. Despite Trump’s summit with Kim Jong Un, don’t expect the North Korean nuclear issue is over.

The headlines may fade in any given week, but geopolitical shocks will return when least expected and send gold soaring in a flight to safety.

Moving on to Italy. Italy’s debt to GDP ratio is amongst the highest in the world.  As the new government in Italy seeks to stimulate growth through increased borrowing, gold’s attractiveness as an asset which is not replicable and is no one’s liability will become more apparent.

Gold is the most forward - looking of any major market. It may be the case that the gold market sees the Fed is tightening into weakness and will eventually over-tighten and cause a recession.

At that point, the Fed will pivot back to easing through forward guidance. That will result in more inflation and a weaker dollar, which is the perfect environment for gold.

Meanwhile, there are numerous risks such as international trade conflicts, political crises, the dispute over Iran sanctions and high-priced stock markets that could be ripe for corrections.