Markets should wait for more stability

Last week, the price of gold spiked above $1,400 per ounce, a level that, signals the beginning of a new bull market for gold.

Many factors have been driving gold’s price higher, including recent changes in the U.S. Federal Reserve’s outlook that increased the chances of future rate cuts, the European Central Bank’s comments from earlier this month signalling that further rate cuts may also be a possibility in Europe, falling U.S. Treasury rates and a declining U.S. dollar.

The surge in the price of gold following the Federal Reserve meeting indicated a material change in market behaviour as the adjustments to the Summary of Economic Projections (SEP) fuel better for lower US interest rates.

Some disappointing numbers coming in from the US strengthened gold prices further.
The US economy showed fresh worrisome signs on Monday as home sales and consumer confidence sank. Sales fell 7.8% to a five-month low in a sign that low rates aren't spurring activity. Consumer confidence also dove to 121.5 from 131.0 as the expectations survey cratered. Those numbers added to the pessimism in the US dollar early and lifted gold for the sixth day.

On a day filled with economic data and Fed speakers, it was St Louis Fed President James Bullard who stole the market's attention with a hint that a rate-cutting cycle isn't coming. Instead of a series of rate cuts, Bullard implied there would be one or two. 

Like a typical Bollywood masala movie, there were a lot of twists and turns that continued on Fed chief and other Fed members as FED GUV had appeared just before Powell’s Speech on 25th June, and he said that an emergency is not beyond the realm for Fed.
Later Powell came out and stated that Fed and the independent Body don’t come under political pressure and that one weak data doesn’t necessarily mean a weak economy.

However, comments from St. Louis Fed President James Bullard, a 2019 voting member on the FOMC, suggested the central bank will insulate the US economy with an “insurance cut” as the official insists that a reduction of “50 basis points would be overdone.”

Moreover, Chairman Jerome Powell pointed out that the baseline outlook for the US economy “remains favourable and it seems as though the FOMC will take a more reactionary approach in managing monetary policy as the central bank head pledges to “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

With that said, details of a US-China trade deal may ultimately lead to a minor adjustment in monetary policy, but Chairman Powell and Co. may have little choice but to re-establish a rate cutting cycle as the Trump administration continues to rely on tariffs and sanctions to push its agenda.

These price movements had a spill effect in the domestic markets too. Local gold prices hit a record ₹35,960 per 10 grams on Tuesday, having jumped more than 10% over the past month. People generally don’t tend to buy gold in such high volatile markets. Such high jump in prices is welcomed with a dampening demand as investors and consumers would prefer to buy gold in a more stabilised market.

So all in all, the DOW turned weak. The US 10y yields did not gain and still hover 2.00%. This is one indicator that rate cut will be there and the dovish view has to be maintained by FED and that’s the reason that gold cannot be bought at $1405-$1425.
We would advise markets to wait for more stability and clarity on the global economic front.

Uncertainty High, Gold High

Gold prices have surged this month, passing $1,400 an ounce for the first time since 2013.
Gold is headed for its best week in three years with it set to close near $1,400 per ounce.
Sentiments in markets are bullish and it’s quite simple to state the reasons for the same.

Everything from dovish central banks, technical indicators, negative-yielding bonds and fears of a military strike between the US and Iran are all working in favour of higher bullion prices.

The best performing metal over the past 15 days was gold, up 4.26%. Initially gold traders and analysts were quite neutral on their price outlook for gold. They thought gold will remain more or less stabilised until it hit a five-year high this week and broke above $1,400 per ounce. Bullion got a huge boost after the Federal Reserve kept interested rates unchanged on Wednesday and signalled a readiness to cut rates due to increased economic uncertainties.

Another reason why gold is back in the limelight is that investors are seeking havens amid slowing global growth due to the fallout from the U.S.-China trade dispute. Furthermore, central banks are globally adopting a more dovish tone.

Last week on Wednesday, the Fed left its key rate unchanged and it dropped a reference to being “patient” on borrowing costs and forecast a larger miss of their 2% inflation target this year. The greenback weakened to erase its 2019 gains while the yellow metal strengthened.
In the past week alone the price shot up almost 10 per cent, to $US1408.80 an ounce, with the depreciation of the Australian dollar pushing the price in local currency terms to record levels above $2000 an ounce.
The movement in the past week points to one of the factors driving the price. The 9.8 per cent spike appears to have been a direct response to last week’s US Federal Reserve Board’s meeting, which signalled likely cuts to US official interest rates later this year.

Gold prices rallied to six-year highs last week and continued posting gains on Monday at $1,403 per ounce. In the move to reduce its dependence on the dollar, China has been piling up its reserves, which has added to the precious metal’s resurgence.

The People’s Bank of China has purchased more than 70 tons of gold since December, according to the World Gold Council (WGC). Before that, the Chinese central bank had not reported an increase in gold reserves for more than two years, and the official figures remained unchanged from October 2016 to November 2018.

In fact, it’s not just China. Central banks generally have been diversifying their reserves away from US Treasuries. According to the World Gold Council, they bought 145.5 tonnes of gold in the first quarter of this year, the most since 2013
Central banks continue to show their love for gold. Kazakhstan raised its gold holdings to 11.93 million ounces in May, up from 11.79 million ounces in April. Russia’s climbed from 70.2 million ounces to 70.42 in May. Turkey was also up to 16.03 million ounces in May from 15.99 in April. Additionally, Turkey saw it's gold reserves rise $167 million this week from the previous week to now total $21.7 million worth of reserves, according to central bank data.

President Trump might be starting a currency “war,” in addition to the ongoing trade war. After the European Central Bank (ECB) announced it was prepared to cut interest rates further below zero, Trump published a series of tweets accusing the bank of unfair competition. Trump has spoken of reigning in the dollar, which would likely be positive for the price of gold, as the two have historically had an inverse relationship.

President Trump’s threat to put tariffs on Mexican imports led to the gold price jumping in June. By linking tariffs to non-trade issues, Trump has increased the range of issues that could be complicated with tariffs and hence raised the level of uncertainty. Although the threat of tariffs lasted for only a week, gold held on to its gains.

The world’s two largest economies US and China have been involved in a trade conflict since March 2018. In the latest escalation, the US increased tariffs to 25% on $200 billion worth of Chinese goods. China, in response, introduced duties of 25% on 5,000 US products worth $60 billion.

The US-China trade dispute is ongoing and the US is holding trade talks with Japan and the EU this year. In addition, the UK still has to leave the EU, so economic uncertainty looks likely to remain high, giving investors several reasons to look to gold as a safe haven.