Tug of War for Gold

Till date, 2018 has been quite an interesting year for global financial markets. While the year started with the untying of the crypt currencies market, with the main assets falling by more than 50% and creating a huge wave of uncertainty across all asset class.

Following that, global financial markets started to fall, proving that the markets could drop even further

And when that was not enough, Trump flustered the financial markets by talking about tariffs to the Steel and Aluminium imports in a bid to protect local companies.

The Trump administration said that the tariffs would protect U.S. industry, but the dollar and Wall Street shares slumped as the plan sparked fears of a trade war and worries about its potentially negative impact on the world's largest economy.
 
This will definitely open doors to a new trade war across the globe. As past events have shown, trade wars are never beneficial to any country.

An announcement by President Donald Trump regarding intentions to levy steep tariffs on imported steel and aluminium sparked a substantial sell-off in broader equity markets with traders finding relief in perceived safety of Gold.

The move fuels concerns that retaliation from competing countries could instigate a global trade war.

Meanwhile, Federal Reserve Chairman Jerome Powell said on Thursday there was no evidence the U.S. economy is overheating, and labour markets may still have room to improve as the central bank sticks with a gradual pace of rate hikes.           

These consecutive evens have lead to a rise in the demand for the safe haven asset, thus pushing its prices high . Gold finally broke out of its Asian/early European session consolidation phase and spiked to fresh session tops in the last hour of the trading session on Friday.

A fresh wave of US Dollar selling interest, triggered by the US President Donald Trump's tweet on trade war, provided some lift to dollar-denominated commodities - like gold.

Adding to this, global risk aversion trade, as depicted by a sea of red across European equity markets, was further seen underpinning demand for traditional safe-haven assets and remained supportive of the precious metal's uptick.

Further, a goodish pickup in the US Treasury bond yields, amid growing speculations about faster Fed monetary policy tightening cycle, continued capping any strong gains for the non-yielding yellow metal.

This year, gold has traded within a narrow range. It has had a high of $1,365 and a low of $1300.  At the current price of $1307, gold has had a 50% retrenchment from its peak price of $1365. Ultimately, a combination of global risks and increased inflation may push the price higher.

After a busy week of economic data and hawkish commentary from Powell, there were only two reports on Friday. Revised University of Michigan Consumer Sentiment came in at 99.7, beating the 99.4 estimate, but coming in under the previous 99.9. Revised University of Michigan Inflation Expectations came in unchanged at 2.7%.

The focus now shifts to key central bank rate decisions next week from the RBA, BoC, BoJ and ECB with the release of the February U.S. Non-Farm Payroll figures (NFP) highlighting the economic docket.

 For gold, the importance will remain on the wage growth numbers coming Friday as the inflation outlook remains central focus for the Federal Reserve. As it stands, market participants are factoring three rate hikes this year, (starting with this month) and if the inflation picture improve expectations for higher rates may weigh on demand for gold which does not pay a dividend.

It is this pull and push war between interest rate expectations and the perceived threat of inflation / geological risk that has fueled four swings of more than 4% on either side over the past two months.
 The precious metals market would continue looking out for interest rates along with the dollar's movement. A stronger dollar and higher interest rates reduce demand for non-interest bearing gold as the metal becomes more expensive for holders of other currencies.
 
It would now be interesting to see if bulls are able to maintain their upper hand or the uptick is being sold into amid absent market moving economic releases from the US.
   

Surprises in store for the market

Over the past 20 years, gold has outperformed alternative and traditional assets, such as developed market stocks, hedge funds, developed markets debt, global real estate investments and the broader commodities complex. It has always been a reliable asset in times of crisis and uncertainties- be it global, economic or political.

Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs since last year.

Gold’s price is in a strong uptrend over a year old, high in its young bull market.  Gold isn’t far from breaking out to its best levels since September 2013, a really big deal.  The stock markets even finally sold off after years of unnatural calm.  Yet traders are still down on gold. The reason being various pull and push factors that are influencing gold prices and capping it from rising.

We have seen that perception and action go hand in hand. In the bullion markets too prices movements drives psychology.  When something’s price is rising, suddenly everyone wants to have that and this excitement makes the market bullish. Market players increasingly buy to ride that upside momentum, amplifying it.  Of course the opposite is true when a price is falling, which breeds bearishness and capital flight.  Given gold’s great technical picture today, investors and speculators alike should be growing enthusiastic about its upside potential as there are more push factors for gold rather than pull.

Volatility has jumped across financial markets this month as investors worry about the pace of U.S. rates hikes in the wake of data showing a rise in inflation.

GOLD PRICES struggled to recover from yesterday's sharp drop against the rallying US Dollar in London on Wednesday, halving last week's 2.2% gain as world stock markets fell, bond prices steadied and commodities edged higher.

Spot prices have shed 1.4 percent this week, their biggest weekly decline since early December, after failing to sustain a brief push back above $1,360 an ounce last Friday, the 16th.

Spot gold slipped, erasing earlier gains, as Federal Reserve meeting minutes showed increasing confidence in the strength of the U.S. economy, curbing demand for the metal as a haven.

Louis Fed President James Bullard on Thursday tried to tamp down expectations of four rate hikes in 2018. Three increases are widely anticipated

Fed officials “anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labour market conditions would strengthen further,” according to minutes of their Jan. 30-31 meeting released on Wednesday. This resulted in the strengthening of the U.S dollar as it headed for a fourth straight gain, and Treasury yields pushed higher.

Immediately after the minutes were released, gold prices rose while dollar slipped as investors assessed comments that officials remain concerned with the pace of inflation. The metal has fluctuated this month as traders look for clues on the pace of monetary tightening, which curbs the appeal of non-interest-bearing assets such as bullion.

With unemployment already the lowest since 2000, the Fed’s view entails that greater growth would risk overheating the economy and potentially warrant a faster pace of interest-rate increases, thereby blunting the effect of the tax changes. Lawmakers could potentially question Fed Chairman Jerome Powell on these issues when he testifies before Congress next week in his first hearings as central bank chief. With Yellen out of the picture and Powell taking over, we await a lot to happen in the market soon.

Gold being bought on dips

Last week saw gold record its sharpest weekly gain in more than a year, as it fed off the dollar’s slump. As the week began, gold fell modestly on Monday in electronic trade, though in thinner action, as many traders took the day off for the Presidents Day holiday.

Gold prices were hit on Tuesday, with the commodity booking its sharpest daily decline in more than a year, against a backdrop of a strengthening dollar and stabilizing equities.

Gold seemed struggling to gain any grip and remained within striking distance of one-week lows. A strong follow-through US Dollar buying interest, further supported by a positive tone surrounding the US Treasury bond yields, continued to dampen demand for dollar-denominated commodities - like gold.

The precious metal dropped to an intraday low level of $1325 but further losses remained limited in wake of reviving safe-haven demand on the back of a sharp turnaround in European equity markets.

Precious metals lost ground as the dollar sprung higher following last week’s sharp decline, which has mostly extended a protracted downtrend for the commodity-pegged currency. A weaker dollar can boost commodities priced in dollars, because it makes them cheaper to buy for holders of other currencies.

Another turn-around in the dollar has weighed on gold, especially as it happened when gold prices were once again challenging recent highs.

The rebound, however, lacked any strong certainty amid expectations for a faster Fed monetary policy tightening cycle. Hence, the key focus would remain on the highly anticipated FOMC meeting minutes, which would help determine the next leg of a directional move for the non-yielding yellow metal.

Even though gold lost its lustre, market players saw this dip as a good buying opportunity. Exchange-traded funds increased holdings of gold and silver this week, reports Commerzbank.  Investors appear to be viewing the price slide as a buying prospect, as gold ETFs saw inflows of 2.7 tonnes

Bullions Attracts Investors

Dollar remained weak in spite of a strong economic data and gold was once again in demand acting a hedge tool against inflationary pressure.

Gold prices edged higher on Friday, heading for their biggest weekly percentage gain in nearly two years, buoyed by a weaker U.S. dollar and as investors looked to hedge against inflation.

After April 29, 2016, we saw gold rising more than 3 percent in a week. Spot gold was up 0.4 percent at $1,358.40 an ounce on Friday, after touching a three-week high of $1,360.
   
There was high demand for gold ahead of the Chinese New year. This rise demand along with a weak dollar pushed gold prices higher.

The dollar slipped to a three-year low against a basket of currencies on Friday, and was headed for its biggest weekly loss

in two years, as bearish factors offset support the U.S. currency could take from rising Treasury yields.

The important data released was     
• U.S. producer prices accelerated in January,
• There were strong gains in the cost of gasoline and healthcare.
• The Labour Department said its producer price index for final demand rose 0.4 percent last month after being unchanged in December.
• The Labour Department said initial claims for state unemployment benefits increased by 7,000 to a
• Seasonally adjusted 230,000 for the week ended Feb. 10.

Gold continues to carry its shine in the second month of the year. The spill over effect continued for gold in Feb as we saw the yellow metal gaining positive traction for the fifth consecutive session on Friday and moved within striking distance of multi-month tops, set in January.

Over the last couple of weeks, we have seen a lot of things happening globally. And the moist important was the stock market pullback that the world markets witnessed a couple of weeks back. This volatility kept investors focused on rising bond yields (inflation) and potential interest rate hikes.

There is a lot of uncertainty and volatility prevailing in the markets and one sectors that totally benefits with such a crisis is the commodities sectors, precisely bullions
And that the reason investors tend to divert their portfolio into safe havens- bonds and gold

 The yield on the 10-year US Treasury bill hit 2.88% and gold resisted its usual trend of moving inversely with the dollar by gaining six tenths of a percent to $1,345 an ounce.
Currently, after viewing the various markets, investors feel that the safes place to park your funds is the commodities markets. There are many reason that justify this thought-

Inflation
The higher the rate of inflation, or expectation of inflation, the more yields rise, because bond investors demand higher yields to be compensated for inflation risk.

Commodities can be the beneficiary of higher bond yields especially if long-term interest rates rise.


Weak US dollar 
Commodities are priced in US dollars, so there is a strong correlation between the strength of the dollar and commodities. A weak dollar plus a basket of currencies being strengthened on the other side, is making gold more attractive,

The USD has dropped in relation to other competing currencies, such as the euro, the pound and the yen. Rising inflation is also diminishing the value of the dollar is diminished. Moreover, uncertainty about US trade relationships has also weighed on the greenback.


Rising Demand but shortage in supply
Most of the gold market is driven by investment, but there are some interesting things happening that makes this a very good time to consider an investment in gold or gold stocks.

Simply put, the world is running out of gold, especially the stuff that’s high grade and easy to find, and this makes me bullish on the precious metal - irrespective of all the familiar demand factors like safe haven, inflation hedge and store of value.

Till 2014, commodities were not considered to be a real fund puller. Many kept away from the bullions as there were other options, like rising equities where investors ploughed their money. But now , that the precious metals are giving incredible returns and also proving to be safe haven assets, its time that investors start re thinking of parking their funds into this sectors that continues to gather momentum in 2018.