Sentiment Shift In The Market

Past week, we saw investors moving away from gold as sentiments shifted to bearish. A strong US economy and a strengthening dollar led to this shift. Investors were confident that the U.S economy is relatively strong and this made the stock markets go wild. Moreover Gold failed to attract investors fleeing from the biggest selloff in six years in global equities as U.S. Treasury yields rose to four-year highs.

Last Thursday, bullion was headed for a 1 percent weekly decline as it fell to a one-month low of $1,306.81 over expectations of a rate hike soon in 2018.

Investor’s expectations of rate hike were driven high by the following factors-
• unexpectedly low U.S. unemployment figures
• Signals from the U.S. Federal Reserve,
• and other data showing the country’s economy


As we all know that higher interest rates make gold less attractive to investors as a safe haven because it does not pay interest. Instead this time, investors treated the dollar as a safe haven.

A stronger dollar makes dollar-denominated bullion more expensive for users of other currencies.

The global market selloff, sparked by last Friday’s jump in Treasury yields, and bets that the United States could see at least three interest rate hikes in 2018 due to improving U.S. fundamentals have propelled the U.S. dollar in recent days

Gold prices made little headway Friday, seemingly digesting losses suffered earlier in the week. But at the start of the week, yellow metal got a bit of a boost, thanks to a weaker US dollar.

Gold prices rose on Monday, 12th Feb, as the dollar slipped, but gains are expected to be capped ahead of inflation data from the United States this week that could mean U.S. interest rates increase more quickly than expected.

The dollar slipped against a basket of six major currencies as a bounce in equity markets ended a strong run for the greenback, used by investors as a safe place to park assets in times of financial market volatility.

Spot gold was up 0.4 percent at $1,321.16 an ounce at 0940 GMT. It has fallen more than 3 percent since hitting a 17-month peak at $1,366.07 in January. U.S. gold futures rose 0.6 percent to $1,323.20 an ounce.

Worries about inflation in the United States surfaced after data this month showed jobs growth surged and wages rose, bolstering expectations that the U.S. labour market would hit full employment this year.

But investors still feel that the dollar will strengthen once the infrastructure spending plan will be unveiled by President Donald Trump.

If the markets are amply convinced that the scheme will deliver a potent boost US economic growth and push inflation upward, that is likely to inspire bets on a steeper Fed rate hike cycle. This will probably revive the greenback’s recovery, tarnishing the appeal of anti-fiat assets epitomized by gold.

Whatever the reasons for the shift change in market sentiment, from macro factors to algorithmic trading, these abrupt index plunges and the rise in volatility have spooked investors across the globe and have led to panic selling and active profit-taking. With a low volatility environment less certain than before, market consensus on ever-increasing stock prices may be beginning to unravel.

Where is Gold Heading To

AN upbeat U.S data and a strong dollar played key roles to pull down gold prices during the week. A lot was expected to happen over the number of data releases-

US employment report, ahead of that there is
• Data on Spanish unemployment,
• UK construction PMI
• EU PPI
• Italian CPI
• US data on factory orders
• University of Michigan consumer sentiment
• Inflation expectation.

Of these, markets remained focussed on U.S nonfarm payrolls data and gold seemed to be behaving reacting to this influential factor

An expectation of strong economic number coming in from US strengthened the dollar. Spot gold was down 0.3 percent at $1,345.22 an ounce as the dollar ticked up against the euro ahead of hotly anticipated U.S. non-farm payrolls data, which would further give fresh clues on the outlook for U.S. interest rates.

Stronger than expected numbers could shore up expectations for the Federal Reserve to press ahead with interest rates hikes this year thus increasing the opportunity cost of holding non-yielding bullion

The dollar rose 0.2 percent against the single currency in early trade, though it remained on track for a seventh straight weekly loss. Its early signs of strength pressured gold, which is priced in the U.S. unit. Once data was out, gold didn’t show that great reverse effect as expected.

 Gold ended the week little changed, after rising in six out of the last seven weeks and hitting its highest in 17 months last week at $1,366.07.

 Data released was as follows -   

• Nonfarm payrolls and unemployment rate- non-farm payrolls grew by 200,000 in January and the unemployment rate was 4.1 percent, while wages saw their biggest jump since the end of the Great Recession, the Bureau of Labour Statistics said in a closely watched report Friday.

• Hourly Earnings- More importantly, average hourly earnings increased 2.9 percent on an annualized basis, the best gain since the early days of the recovery in 2009. In addition to the solid payroll growth, average hourly earnings were up 0.3 percent for the month, matching estimates and reflecting an annualized gain of 2.9 percent. That was the best since mid-2009 as the two-year economic slump was coming to a close. However, the average work week fell two-tenths to 34.3 hours.

Within the jobs report, Wall Street and policymakers are watching wage numbers closely. While job gains have been solid and consistent, salary growth has been elusive. This report could change the narrative and might push the Fed to get more aggressive with interest rate hikes.

The Fed held interest rates unchanged after its latest policy meeting this week but raised its inflation outlook and flagged "further gradual" rate increases.           
 
During the December meeting, the Federal Reserve said that it expects that economic conditions “warrant gradual increases,” in the federal funds rate, and added that inflation declined in 2017 and was running below 2%.

Should the Federal Reserve reaffirm expectations for three rates hikes, bond yields could surge.
Some market participants warned, however, that the yellow metal may face a period of weakness as physical gold demand is expected to decline as seasonality is starting to fade ahead of the Chinese New Year.

With many other asset classes already at record price levels, there is a risk of corrections either while geopolitical developments unfold or as inflation and interest rates rise to the extent that investors take profits. Investors may well see gold as offering a relatively cheap safe haven while corrections unfold in other markets

Now gold has already broken above its 2017 high of $1357, as we had expected, before retreating over the past few days. It has now taken out some short-term support levels in the process, but the key support levels such as $1335 and $1325 are still intact, so the long-term technical bullish outlook remains in place for the time being. If we are going to see new highs for the year in the coming days, then gold will have to break back above those short-term broken levels, which are now acting as resistance. Among these, $1344/45 is an interesting level to watch today. If there’s acceptance above it then don’t be surprised to see gold go back above $1357 – the 2017 high – soon. And if gold were to get back to these levels then it would increase the probability of it reaching for liquidity that is resting above the 2016 high of $1375 next. On the flip side, if $1335 gives way first, then one will have to consider the bearish argument, more so if it also goes below $1325.

Is gold no longer being affected by a Rate Hike

Fed rate hike pulls down gold prices: No more an implied reaction for the yellow metal.
Though gold prices were flat in Wednesday ahead of the Fed meet, it managed to close higher. Initially gold prices dipped slightly after the U.S. Federal Reserve said it would keep interest rates the same, but expected inflation to rise this year.

On Fed Chair Janet Yellen’s last policy meeting as head of the central bank, the Fed left interest rates unchanged. But its message on inflation signaled it was on track to raise borrowing costs in March under incoming chief Jerome Powell.

History has shown that worries over inflation results in a rise in gold prices, which is seen as a safe haven asset against rising prices. But expectations that the Fed will raise interest rates to fight inflation make gold less attractive because it does not pay interest.

Moreover, stronger dollar pressures commodities priced in the currency, making them more expensive for buyers using other currencies. And this was exactly what happened on Wednesday.
The U.S. dollar turned positive after the Fed statement thus resulting in a dip in gold prices. But the effect wasn’t that severe as there were no significant announcements apart from just a hawking tint in the statement released by the Fed.

With many other asset classes already at record price levels, there is a risk of corrections either while geopolitical developments unfold or as inflation and interest rates rise to the extent that investors take profits. Investors may well see gold as offering a relatively cheap safe haven while corrections unfold in other markets.

What the market now await is two more rate hiked in 2018 , which if executed will pull down gold prices significantly.Till then we find gold in a comfortable zone, not paying much heed or reaction to a single rate hike.

$1375 an ounce - A Crucial Mark for gold

This past week will be remembered for the cracks it revealed in the global monetary and trade building. At the Davos conference, the expression became unusually vociferous and purposeful with accusations and threats flying in all directions. Contradictory statements being mocked at and investment opportunities being knocked at.

The one thing the brewing currency and trade wars are likely to inspire among the local populace is strong gold and silver demand in both its physical and paper forms. Speculators will be looking to capitalize on currency and market instability while private and institutional investors are likely to step up their hedging strategies.

The inverse relationship between the dollar and gold has gathered strength both from the administration’s protectionist policies and the massive increase in deficit spending projected to result from recent changes to U.S. tax law. Equities remain strong, but the dollar has fallen, as might be expected, and gold prices have benefited with the drop in the U.S. dollar.

The price of gold rose 13% last year, about half as much as the Dow Jones Industrial Average and less than half as much as the Nasdaq Composite. On Thursday it reached a 12-month peak at over $1,362 an ounce, following what have now been characterized as misconstrued comments by U.S. Treasury Secretary Steven Mnuchin on the Trump administration’s view that a weak dollar is a positive for U.S. exports.

With potentially conflicting comments, the weakness of otherwise of The U.S. dollar from U.S. Treasury Secretary Steve Mnuchin and President Trump, the gold market didn’t know which way to run. 

In morning trade on Thursday, gold jumped to its best level since August 2016 touching a high of $1,365.40 an ounce after comments from US Treasury Secretary Steven Mnuchin at the World Economic Forum in Davos Switzerland sent the dollar lower.

Mnuchin had to backtrack, but not particularly convincingly, on his weaker dollar being beneficial to the U.S. economy statement lest he be accused of talking the dollar down in conflict with U.S. assurances that it would not do so. 

The dollar was on track for its biggest weekly decline since May. President Donald Trump’s comments on Thursday that he wanted a “strong dollar” failed to lend much support, a day after Treasury Secretary Steven Mnuchin said a weaker greenback would help short-term U.S. trade balances.

President Trump’s Davos statement suggested he was in favour of a stronger dollar, contrary to his earlier position on the currency, and following this the dollar rose, and gold fell on Thursday.
The metal reversed course in the afternoon after US President Donald Trump told CNBC that Mnuchin’s comments had been misinterpreted:

“The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,” Trump said.

Gold prices rose on Friday, after falling from 1-1/2-year highs in the previous session, as the dollar remained weak despite U.S. President Donald Trump backing a stronger currency.
Spot gold had climbed 0.6 percent to $1,355.16 per ounce during Friday trading hours.

 The US dollar reverted to lower levels in Friday afternoon trade in the U.S. and gold rose back above $1,350 before activity in the futures markets and gentle dollar support brought gold back to heel and the yellow metal ended the week a fraction under the key $1,350 level.

Gold and the US dollar usually move in opposite directions and the greenback has declined sharply against major currencies since Trump's inauguration. The euro has gained 15% against the US currency, the British pound more than 13% and the Canadian dollar nearly 8% in little over a year.

Gold has gained more than $100 an ounce since mid-December. Large-scale speculators increase their exposure to gold on derivatives markets by doubling net long positions – bets that gold will be more expensive in future – in the space of three weeks to the equivalent of 20m ounces.
Retail and institutional investment in gold-backed exchange traded funds (ETFs) also continues to grow.

According to data compiled by Bloomberg ETF vaults now hold around 2,250 tonnes, the most since May 2013, as investors piled in ahead of a US government shutdown.
         
The break above $1,330 has given fuel to gold's rally and the first target of this movement could be seen at $1,375 and if it crosses this mark then the rally could continue with targets at $1,390 and potentially at $1,415.

To an impartial (relatively) external observer of the market, the gold price did appear to be trying to rebound back above $1,350 but kept being knocked back again.  Whether it can build sufficient momentum to breach the $1,350 level permanently remains to be seen, but one suspects it will do so barring any major adverse news or data.