Be Vigilant to Be Ahead

With even a minor drop in gold prices, many players in the market start doubting gold’s rally and raise questions about the gold bubble. Similar things happened this week.

Initially, gold was pulled down. Mario Draghi positioned up a September easing package but that wasn’t enough for the gold market. It hit $1433 after the initial ECB statement but the lack of action resulted in a drop in gold prices as it was down by $9 to $1416.

The ECB left interest rates unchanged at its meeting on Thursday, but its President Mario Draghi signaled that the bank was prepared to cut rates in September.

Market participants are now looking forward to the U.S. central bank’s monetary policy meeting, where it is expected to trim its interest rate by at least 25 basis points.

President Trump stressed his point to US Fed to do a sharp interest rate cut, rather his recently appointed member Shelton advocated for 50bps cut.

U.S. GDP data, which is due on Friday, is expected to show that U.S. economic growth slowed to 1.8% in the second quarter from 3.1% in the previous quarter.

If markets decide that the Trump administration’s commitment to the strong dollar is under review, investors are likely to sell the US dollar hard, including versus gold.

Furthermore, China added more gold to its foreign reserves in June, for the seventh month in succession. In fact, it is not the only country that’s piling up gold.  In 2018 alone, central banks bought 651 tonnes of gold, up 74 percent compared to 2017 and the highest level since 1971. Over the past decade, central banks have purchased more than 4,300 tonnes of gold, taking their total holdings to around 34,000 tonnes today. The trend has continued in 2019, with net purchases reaching 90 tonnes before the end of the first quarter

Central bank purchases of gold are no guarantee that gold prices will rise but they indicate to the wider investing community the underlying and potentially price-supportive demand for the precious metal. Also, historically, a rise in international tensions has proven somewhat supportive of the gold price, and there is certainly no shortage of that at the moment.

A lot of fuel is expected to be added to keep gold supported. Given the ongoing tensions in the Gulf, the various trade disputes and other geopolitical uncertainties, Prithviraj Kothari expects gold prices to strengthen further.

Gold traders should place stop at $1409.5 (i.e. breaking this will straight-pull it down to $1400) be vigilant. Buy at $1414 for targets $1422-$1425 at most towards advance GDP data. 

Gold Might Perk In the Near Future

We all know that when gold prices rally, all market players join the bull’s bandwagon. Currently, also markets have not left a single stone unturned in proving the fact that gold will touch $2000 an ounce by year-end and cross Rs. 40,000 per 10 gram in the domestic market.

Well, it’s too early and even very difficult to predict even the near term gold price movements because there is so much happening around that stabilizing gold prices seem to be a far reality.

There are three reasons why gold has popped in the last several months -

• Recession risks that have gone up.
• Rates that have been trending lower
• 10-year real yields have gone from 1.2[%] to 25 basis points.

Last week following dovish comments from New York Fed President Williams gold prices traded above U.S. $1450. Less than a day later a spokesman for the New York Fed “clarified” Williams comments saying they were not about immediate policy direction.

If you found last week’s dovish Fed message followed by the backtracking in follow up news articles confusing you are not alone Geopolitical risks from the Persian Gulf could provide some support for the yellow metal, but the next major move will likely be if the Fed is dovish enough for markets. Last Friday, with US Iran tensions escalating, precious metals were seen at new 2019 highs.

Currently gold is at a 6,5year high but it couldn’t sustain. The $1415- $1420 in general is good support to revisit towards $1450-$1460.

After five years of being stuck in a trading range, gold prices have broken out in the last six weeks, igniting a rally to multiyear highs. Prices held near those highs on Monday as investors awaited word from the Federal Reserve about whether the central bank would cut interest rates at its next meeting.

Making the decision less clear cut, tensions between the U.S. and Iran continue to escalate, and with market pricing set at more reasonable levels, there is room for both the ECB and FOMC to deliver a dovish surprise at their upcoming meetings.

The year of 2008 brought 350 basis points of softening into US rates. And then it took a full seven years for the Fed to make another move when the Yellen-led Fed posed her first actual adjustment to the discount rate. Another hike followed in 2016, a little over a month after the US Presidential Election; and then a full seven rate hikes followed in 2017 and 2018. Suffice it to say, this was a stark change-of-pace to a market environment that many had come to rely upon.

Joining these series of events, 31st July at 11.30 pm (IST), The Fed verdict will be stamped and till these 8 days, the markets speculation will also continue.

On Tuesday President Trump stressed his point to US Fed to initiate a sharp interest rate cut. Rather his recently appointed Fed member Shelton advocates for 50bps cut.

So whatever happens on 31st July, gold is still expected to perk as dovish statements will be associated with the event.

In summary, despite the possibility that the current pullback has further to go, our managing director, Prithviraj Kothari feels that the uptrend in gold is likely to re-establish itself with potential towards the next upside target of U.S. $1480/1500.