Investors continue to favour gold

I have been talking in a few of my previous blogs about the right time to buy gold. Should we jump into the wagon or should we wait. Every time the market feels that now we should consider gold, each time gold has been failing at proving its worth.

This week too gold showed some similar trends. The Fed on Wednesday 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

On Thursday, gold fell back below $1,190 to a six-week low. The precious metal is now on track for its sixth straight month of losses, its longest losing streak since 1989.

Spot gold has been a path to ruins on the back of the dollar's spike on market optimism over the impressive run of economic performances in the US economy, streaks ahead of its 'competitors' and the latest Durable Goods and in line GDP data gave the dollar a boost.

The release of the final U.S. gross domestic product for the second quarter “put downward pressure on the yellow metal. The pace at which the U.S economy is growing has been tagged as strong and was further validated by the comments coming in from the Federal Open Market Committee (FOMC).

The Fed balanced their hawkish statement by mentioning that the committee is a little less optimistic about the long-term future outlook and this part alone was enough to keep the dollar index in check and this was the reason that though gold slipped, the down fall wasn’t as severe as expected.

The reason why people are still favouring gold is that it hasn’t dropped that far. There are buyers for gold at $1180 also, because the bears have not moved underneath $1,150.

But does that mean a gold price rise is coming soon? Overall market watchers attending the show seem to agree that while an increase is coming it won’t necessarily be in the near term.

The time for Gold should come soon

Gold prices gained on Friday and were at weekly record gains, while the dollar also traded higher although it is still hovering near two-month lows.

The dollar fell to a nine-week low against a basket of major currencies on Thursday as investors shifted their focus from a trade row between China and the United States to the Federal Reserve’s monetary tightening plans.

Currency markets have become more settled since reacting strongly to new tariffs announced by Washington and Beijing on Tuesday.

The fall in dollar this week came as safe-haven demand for the U.S. currency ebbed amid continued relief that fresh U.S. and Chinese tariffs on reciprocal imports were less harsh than originally feared.

On Monday, the U.S. slapped tariffs of 10% on $200 billion in Chinese goods, before they rise to 25% by the end of 2018, rather than an outright 25%.
China retaliated by putting tariffs on $60 billion in U.S. goods. However, China will put a 10% tariff on some goods it had previously earmarked for a 20% levy.

Reports of the tariffs imposed by the U.S. and China on each other's goods being set at lower levels than expected were cited as headwind for the dollar prices, which is widely seen as safe-haven assets.
The dollar was also under pressure after a report said that the U.S. and Canada are unlikely to reach an agreement on NAFTA this week.

While trade disputes gained momentum, there was one more thing that has kept the markets on its toes. The next Fed meeting. Investors looked ahead to the next Federal Reserve policy decision to be announced on Sept. 26.

U.S. economic data has remained strong, and the dollar has tended to act as a safe-haven trade, gaining as tensions between Washington and Beijing escalate.

Markets currently expect the Fed to hike rates by a quarter of a point, while fed fund futures price in an additional increase at the end of the year at more than an 80% probability.

Looking ahead, markets would be paying close attention to next week’s Federal Reserve meeting. The U.S. central bank is widely expected to hike rates and discuss paths for future rate hikes. Higher rates dent demand for non-interest yielding gold and in turn boost the dollar in which it is priced.

The Federal Reserve is next week expected to raise benchmark borrowing costs and shed more light on its future rate path.

One more noteworthy thing that happened over the week was gold buying by Russian central bank.  As mentioned in my blogs earlier, the Russian central bank has been piling up its reserves and the latest figures released , stated that it has added a further 1 million ounces of gold (31.1 tonnes) to its reserves that month bringing the grand total to just over 2,000 tonnes as we suggested a month ago. It now has the holdings of Italy (2,451.8 tonnes) and France (2,436.0 tonnes in its sights to become the third largest national gold holder after the USA (8,133.5 tonnes) and Germany (3,369.9 tonnes) – all figures as reported to the IMF.

Russia and China are both believed to by buying gold as they feel the yellow metal will have an important role to play in the ongoing development of the global financial system. Russia and perhaps China too, are also believed to be buying gold, amongst other moves, to reduce their dollar-related forex holdings.

All these considerations suggest one thing- . Gold should shine not only due to the lower real interest rates and as an inflation-hedge, but also as a safe-haven asset hedging against the potential overshooting by the Fed.  We don’t expect any major financial crisis or that there won’t be a rate hike—what we think keeping these considerations in mind- the time for gold should come soon.