Strong Rally in Gold Prices RSBL

We have seen gold nearing a 1 year high over the past few months. But what has supported this rally for the yellow metal? 

Lately, uncertainty in many forms has played a key role. This past week's nuclear test in North Korea shook investors, sending them fleeing to safe-haven investments such as gold. In addition, uncertainties over Congress's ability to pass corporate tax reforms, which are being counted on to boost U.S. GDP growth, have some pundits favouring gold relative to stock-based equities.

Last Friday, the spot gold price was trading at $1,352.50/1,352.90 per oz, up $5.2 from the previous trading day’s close. 

Gold prices were well-bid on Friday September 8 as weaker-than-expected US economic data and the ECB’s decision to leave interest rates unchanged, as well as continued geopolitical risks, maintained pressure on the dollar.

Let’s take c closer look at all the influences- 

US Dollar-Uncertainty and lower-than-expected inflation rates have been doing a number on the U.S. dollar. In recent weeks, the dollar hit multiyear lows against the euro and at least one-year lows against a handful of other major currencies. 

In recent months the dollar has suffered from multiple issues forcing it lower against other major currencies, including political failures, multiple climate-related disasters, geopolitical tensions and weak inflation in the US.

The latter, in particular, has made it more difficult for the Federal Reserve’s Federal Open Market Committee (FOMC) to justify hiking interest rates

The dollar index on Friday morning was down 0.08 to 91.45. Overnight US jobless claims surged to a two-year high because of Hurricane Harvey, which raised doubts over further US interest rate hikes in December.

The dollar and gold usually move in opposite directions, meaning the dollar's weakness has been a green light for gold investors.

ECB Meet- ECB policymakers indicated at their meeting overnight that the European central bank was not intending to weaken the common European currency, which is expected to support euro performance in the short-term. The ECB maintained rates and upgraded its growth forecast this year by 0.3ppt to 2.2%, but maintained its 2018-19 forecasts.

Hurricane- Meanwhile gold prices jumped today morning as an earthquake off the coast of Mexico added to the hurricane damage in the Caribbean and US east coast in driving demand for the traditional safe haven.

U.S Data- The tally was the highest level for initial claims since April 18, 2015, when it was also 298,000, the government said. 

Consensus expectations compiled by various news organizations called for initial claims to be around 241,000 to 242,000. The government left the prior week’s tally at the previously reported 236,000.

Gold prices rose after a Labor Department report Thursday showing that initial weekly U.S. jobless claims surged by 62,000 to a seasonally adjusted 298,000, with the government citing the impact of Hurricane Harvey.

Geopolitical tensions- Geopolitical risks also remain at front of mind, with the USA pushing hard for additional sanctions against North Korea. This kept safe-haven buying relatively strong 

Persistent North Korean tensions and general US dollar weakness propelled gold $15 higher to new 2017 highs overnight, touching $1,249.98 and closing just below at $1,249.50. 

Geopolitical events have boosted precious metals prices. Gold prices continue to push higher, underpinned by geopolitical concerns over North Korea. For any further escalation in the on-going tensions, gold is likely to remain in demand. 

FOMC Meet and Interest Rate Hike-A combination of stubbornly low core inflation and rising doubts about the Trump administration’s ability to pass new legislation has been underpinning the situation. 

Specifically, the failure of high asset prices and strong labour market growth to pass through into underlying inflation is bringing into question how much further the FOMC will be able to lift rates in the near term. While the healthcare bill fiasco and lack of detail around both tax reform and infrastructure spending have underlined the difficulty of turning rhetoric into reality when it comes to shifting growth onto a higher structural path. In consequence, markets have been remarkably sanguine about the FOMC’s anticipated announcement of balance sheet reduction at their September 20th meeting and are now only pricing 25% chance of another hike by year-end.

Prices are closing in on last year’s highs so some nervous profit-taking may emerge, leading to choppy trading, but the combination of North Korea, a weak dollar and low treasury yields are all supportive. Silver and platinum may well follow gold, but palladium prices that are already elevated, may struggle more.

Although this combination of factors clearly presents a constructive cyclical backdrop for gold prices, the extent of the recent rally has surpassed what can be explained by just US rates and the weak dollar. 

Gold steady ahead of Sept. FOMC Meet

After rising for 3 days, gold prices weakened globally and on the domestic front too on weak global cues and easing demand by local jewellers.

Trump reached a surprise deal with Democrats on Wednesday to raise the short-term US debt ceiling, reducing concerns over a potential government shutdown and denting safe-haven demand.

President Donald Trump on Wednesday warned that the US would no longer tolerate North Korea's actions but said the use of military force against Pyongyang will not be his "first choice".

Gold stabilised early on Thursday, sustained by a weaker dollar and enduring concerns over North Korea, as markets awaited the outcome of a European Central Bank (ECB) policy meeting.

Spot gold was little changed at $1,334.06 per ounce during Thursdays trading hours, after easing 0.3 per cent in the previous session.

The dollar edged down against the yen on Wednesday, pushed back toward a recent 4-1/2-month low by the simmering tensions over North Korea and by comments from a Federal Reserve official about subdued US inflation.

Following suit, the dollar remained submissive on Thursday and the euro stood firm ahead of the ECB meeting where President Mario Draghi is expected to start laying the groundwork to withdraw monetary stimulus.

Currently, the escalating geopolitical tensions are bringing a rally in gold prices and the chances of the unrest rising further are high. If North Korea does another missile test, it will trigger risk-off trade thus proving to be of further help to gold.

The market is likely to continue focusing on geopolitical tensions, but it will start to shift focus to the Federal Reserve meeting in September, looking for details on reducing the balance sheet.

The two-day Federal Open Market Committee meeting (FOMC) is due to begin on Sept. 19 and the US central bank is widely expected to leave rates unchanged.

This could create some plunging pressure on gold starting next week and a rebound in the dollar for a short term.

Bullish sentiments for gold

Gold for the week ended with a good sign, as it posted gains in the Friday session, continuing the upward movement we saw on Thursday.

In the North American session, gold was seen trading at $1323.74, up 0.18% on the day. This rise was seen post the release of the labor report told prices have enjoyed a strong week, gaining 1.9%.
The metal showed some strong gains earlier on Friday, as the metal touched a daily high of $1329.05, its highest level since November 2016. These gains were triggered by the disappointing non farm payrolls and wage growth reports for August, both of which missed their estimates.

On the release front, US job numbers were unexpectedly soft. Non farm payrolls slowed to 156 thousand, well below the estimate of 180 thousand. Wage growth also disappointed, as Average Hourly Earnings posted a small gain of 0.1%, shy of the estimate of 0.2%.

Although the US labor market remains tight, investors are fretting about the lack of wage growth, which has contributed to the low inflation which continues to hamper the US economy.

The Federal Reserve will also be perturbed by small wage growth, as a December rate hike is very much in doubt due to inflation levels which obstinately remain well below the Fed's inflation target of 2.0%. Currently, the likelihood of a December rate hike stands at just 36%

Gold is traditionally considered a safe-haven asset, and often benefits when investors get jittery and lose their risk appetite. Such was the case last week, as renewed tensions between the US and North Korea early in the week propelled the metal above the symbolic $1300 level.

On Tuesday, North Korea fired a missile over Japanese territory, drawing sharp condemnations from Japan and the US, with President Trump declaring that "all options remain on the table"

In times of uncertainty or crisis, investors typically take refuge in “safe” options like the Swiss franc, gold or the US dollar, but under President Donald Trump the greenback has lost its lustre, especially to the euro.

Although, tensions have since eased somewhat, if North Korea decides to fire another missile towards Japan or the US military base on Guam, gold prices will likely move higher. As well, as the markets digest the disappointing job numbers, we could see risk appetite continue to wane early next week, which could extend the current gold rally.

The reaction to the lackluster U.S. Non-Farm Payrolls (NFP) report suggests gold will continue to exhibit a bullish behavior ahead of the Federal Open Market Committee (FOMC) interest rate decision on September 20 as mixed data prints coming out of the economy sap bets for another rate-hike in 2017. Even though ‘the Committee expects to begin implementing its balance sheet normalization program relatively soon,’ the fresh forecasts from Chair Janet Yellen and Co. may ultimately heighten the appeal of gold if central bank officials attempt to buy more time and project a more shallow path for the Fed Funds rate.

In turn, U.S. Treasury Yields may stay depressed throughout the remainder of the year, and the precious metal may continue to retrace the decline from 2016 amid the shift in trader behaviour.
Weak U.S. economic data has effectively removed the Fed’s prospective rate rise scenario from the gold price equation – at least for a couple of months although may have an impact in November as speculation will reign over whether the Fed will implement another small rise in December, or kick the can down the road again.  The U.S. dollar is looking weak and a weak dollar tends to see the dollar gold price rise. And it is the dollar gold price which the market judges to be the most important indicator, even though the gold price in other currencies, like the euro or the yen, should perhaps be more relevant.

The seemingly increasing threat of war between North Korea and the USA, will likely give the gold price a huge boost in the days and months ahead with safe haven demand escalating worldwide – and particularly in Asia and the U.S. itself.

Markets seem difficult to trade

After weeks of relative stagnation, gold traders were suddenly awoken to a rise in trade volume and price volatility. In a span of one minute, gold futures contracts equaling more than 2 million ounces traded -- about 20 minutes before Federal Reserve Chair Janet Yellen was to address a gathering of policy makers in Jackson Hole, Wyoming.

The occurrence shook the market after a measure of 60-day volatility on the metal touched the lowest since 2005.

 Gold had been lying stable amid political disharmony in Washington, worries about rising U.S. interest rates and escalating geopolitical tensions between the U.S. and North Korea.

Investors were not expecting Yellen to make a policy statement anyway, but some market participants were hoping for some signal on the Fed's planned balance sheet reduction, if not on the outlook for U.S. interest rate hikes.

Yellen’s speech, which lacked clear rate cues, did little to calm the price swings and damped expectations of a rate hike this year.

Federal Reserve Bank of Dallas President Robert Kaplan helped fuel the sharp move before Yellen’s speech Friday by saying the central bank can afford to be patient on raising interest rates even while noting it should shrink the balance sheet soon.

These comments were dovish and pushed gold prices higher. But then when Yellen didn’t mention monetary policy, things started to stabilize again.

The dollar fell to a three-week low against the euro and a one-week trough versus the yen on Friday after Federal Reserve Chair Janet Yellen made no reference to U.S. monetary policy in her speech at the annual central bank research conference in Jackson Hole, Wyoming.

Instead, Yellen focused on U.S. regulations, saying those put in place after the 2007-2009 crises had strengthened the financial system without impeding economic growth, and any future changes should remain modest.

Dollar had weakened because Yellen "didn't say anything positive for the U.S."

The dollar has been trading higher for most of the week after sharp losses in recent months.

The dollar fell to a one-week low of 109.23 yen after Yellen's speech. It was last down 0.2 percent at 109.33.

The euro, meanwhile, hit a three-week high against the dollar and was last up 0.6 percent at $1.1862.
Focus now shifts to the coming week wherein a few interesting events are lined up.
The yellow metal may remain range-bound in the $1,290s ahead of the U.S. Labor Day holiday on September 4th.

Labor Day can mark a variation point in various economic parameters, including the gold price.  There are also U.S. Fed and ECB policy meetings that will be held in the second half of September and the U.S. FOMC one in particular will be viewed with particular interest vis-à-vis gold given observers will be looking for clues on the likely date for the next interest rate rise decision and/or Fed balance sheet reductions.  The U.S. economy is not showing positive developments as well as forecast by the Fed so there are some who believe any rate increase will now likely be put off until next year.

The period that lies between the Labour Day and The FOMC meeting will be crucial for gold as the markets reactions all depend on this interim period.

Market reaction after Labor Day, and before the FOMC meeting will probably see gold react positively or negatively to economic data (fact or supposition)  coming out in the interim, which may hold gold back from bursting through $1,300, which it would likely do if the FOMC looks like delaying any interest rate rise decision beyond the calendar year end.  An indication that the Fed will indeed continue its tightening programme in December may pull down the gold price , but perhaps not affect its on-going progress in the medium term.

Similarly the ECB policy meeting in Frankfurt, which comes just after the FOMC meeting, will also be followed with strong interest, but may not see any further tightening while the Euro remains at current levels against the dollar.

We still see gold rising through $1,300 and perhaps hitting $1,350 by the year-end, but sometimes Q4 can prove to be a weak period for precious metals, so we are not wholly confident on this prediction.  Currently markets seem difficult to trade!