Gold Not Concerned about a rising dollar

Spot gold fell for a second straight month in March even after the Federal Reserve said it would pause on interest rate hikes for the rest of the year, which lead to a surge in equities instead.  The global spot gold prices were trading slightly higher at $1,274.20 an ounce, while silver was trading up at $14.93 an ounce in New York.

Meanwhile on Wednesday, in the domestic market, gold prices were down by Rs. 50 to Rs.3270 per 10 gm in the capital over weak demand from the jewellers.

It’s proving increasingly difficult for Gold bulls to prove their case under present market conditions, thanks to a broadly stronger Dollar, equity markets hanging on to most of their year-to-date gains and cautious optimism over US-China trade talks.
However, dark clouds still linger over the global economy, and data points that signal a turn for the worse for the worldwide context could spark a massive rebound for Gold back towards the $1,300 handle. The ongoing geopolitical crisis, trade wars, dovish Fed comments will add up to the rally in gold prices.

Gold prices are expected to remain higher by 3.2 per cent this year on account of strong demand and an extended pause in interest rate hikes by the US Federal Reserve, World Bank Commodity Outlook for April 2019 said. The yellow metal rates surged in the first quarter by 6.1 per cent after hitting a downward path in September last year. The rise may be attributed to the support offered by robust demand and decline in the real interest rates, the report said.

We can’t ignore the constant buying by central banks. The  share of gold holdings have been increased by the central banks of the emerging markets such as China, India, Russia and Turkey so as to diversify their asset base, the World Bank report said. The investors have increased their net long positions in the gold-backed exchange traded funds, this has lead to an increase in demand and furthermore an increase in the prices of the yellow metal.

The Dollar’s year-to-date climb has kept Gold rooted near its lowest level in 2019, below the psychologically-important $1,280 level, as markets keep an eye on the $1,265 support line.
Still, the longer term outlook is more bullish as central bank purchases should be supportive of prices, with inflows running as high as last year, and a rally of $1,450 an ounce over 12 months awaits.

Gold is here to stay

Gold was set for a decline last week over strong economic growth numbers. Last week, gold fell ahead of first-quarter earnings season as the dollar gained while the precious metal slumped to its lowest level of the month. Gold fell 1.23 percent at the close of Thursday’s trading session to settle at a price of $1.295.15. Nonetheless, analysts maintain that this is only a temporary setback.

Although equities are doing their part to weigh on gold in the near-term, it is just part of the story. Relative and resilient strength in the U.S. dollar is another factor weighing on the precious metal.

Gold was pulled down over strong economic numbers coming in from the Chinese economy-

• China’s economy expanded more than expected in the first quarter of 2019
• While industrial output and retail sales for March were also better than expected.
• Trade and credit data that came out last Friday also exceeded forecasts

Strong numbers coming in from China, imply that a global slowdown has been diminished to quite some extent. Furthermore, according to the minutes published at its last Federal Open Market Committee meeting, the Federal Reserve did leave open the possibility of possible rate hikes this year if the economic data suggests warranting such a move. This, of course, wouldn’t bode well for gold.
The minutes confirmed that if the economic data continue to support the economy, a rate hike could be on the table at the back end of this year. Luckily for the dollar bears, this wasn’t the majority view, at least, not for the time being.

Does this mean the gold will soon lose its sheen?

Well, gold is being supported by ongoing geopolitical issues (U.S.-China trade war and Brexit, among others), concerns around slowing global economic growth and recession fears, and a more dovish U.S. Federal Reserve (no rate hikes in 2019).
Though many investors are shunning gold and shifting focus to equities, there is a set of market analysts that still believe that gold needs to be added in ones portfolio as its gives an insurance cover.

A crisis is expected and it’s soon we realise that one needs to protect his/her finances in times of crisis. And which metal can best prove to be a safe haven asset other than gold?
Gold had faced a similar situation in 2011. Gold was widely ignored since 2011 as an asset class for institutional portfolios. In 2018, bullish sentiment for gold was at a multi year low. Not many people were interested in owning gold.

But then investors realised that they need to own gold in order to protect themselves in times of crisis.

Given the current situation and what is expected in the near future, we can say that gold is here to stay. Even though equities are rising, the momentum won’t sustain in the long run. Fed is not expected to hike rates in 2019. Less hikes and a rate cut would translate to dollar weakness–an open path for strength in gold. Other headwinds include increasing concerns of slowing global economic growth, which could spur a move to safe havens like gold.

And hence this is a very good time for people to get a little bit more defensive and use gold to reserve the wealth they have made in equities.

Gold declined but still a favorite

Since the turn of the century, the gold industry has experienced a roller coaster ride, with prices rising from $255 an ounce in 2001 to highs of $1,906 a decade later, before falling to $1,056 by December 2015. After a gap of almost 4 years, gold is being seen on the green path once again.

Lately, Gold prices have largely been stuck in a range of between $1,217 to $1,330. Though gold started the year on a positive note, last week it did witness a decline in prices.

The sentiments continued to flow in this week too. Gold prices slipped on Monday and they further slipped for a fourth straight session on Tuesday as recent upbeat economic data and signs that Washington and Beijing were making headway in a nearly year-long tariff skirmish boosted risk sentiment.

The main reason for the decline in gold prices were the data numbers coming in from world economies.

Pressures were created on gold as improved economic data came in from China. China reported better-than-expected credit and export figures last week that allayed concerns regarding the pace of economic growth.

• Coming to the U.S., the dollar held firm on Friday after strong U.S. labour and inflation data soothed concerns about the world’s largest economy. As we all know that dollar and gold are inversely related and hence a strengthening dollar pulled gold prices down.
• Furthermore, falling oil prices weighed on commodity-linked currencies such as the Canadian and Australian dollars.
• The number of Americans filing applications for unemployment benefits fell to a 49-1/2-year low last week, pointing to sustained labor market strength that could temper expectations of a sharp slowdown in economic growth.
• U.S. producer prices increased by the most in five months in March, but underlying wholesale inflation was tame.
• U.S. President Donald Trump on Thursday expressed a willingness to hold a third summit with North Korean leader Kim Jong Un but said in talks with South Korean President Moon Jae-in that Washington would leave sanctions in place on Pyongyang.
• European Union countries gave initial clearance on Thursday to start formal trade talks with the United States, EU sources said; a move designed but not guaranteed to smooth strained relations between the world’s two largest economies.
• The six-month delay of Britain’s exit from the European Union avoids the “terrible outcome” of a “no-deal” Brexit that would further pressure a slowing global economy but does nothing to lift uncertainty over the final outcome, the head of the International Monetary Fund said on Thursday
• Moreover, growing optimism over a US-China trade war resolution strengthened the dollar.
• Better economic conditions stoke investors to pivot towards equities that are interest-bearing assets, and shun the non-yielding bullion

But still gold is expected to perform better in the following months. Gold has been witnessing a great start in the current year and many market players believe that it will continue to do so in the near term-  mainly due to
• Concerns over global economy
• Geopolitical issues
• Federal Reserves less aggressive stance on interest rates. The view is that there won’t be any interest rate rises this year, which again will be supportive for the precious metals sector
• Global uncertainties
• Central bank buying
• US China trade war
• De dollarization

Gold is expected to garner safe-haven interest as investors look to protect themselves against an impending recession which might even push gold above $1400 an ounce by the second half of 2019.

Gold vs Stocks

Past 3 to 4 years haven’t been that exciting for gold. In fact gold has surfaced to the current $1300 an ounce, a level that was previously seen 6 years ago. Gold has been trading in a tight range for quite some time.

Gold is an investment that people prefer when the times are uncertain. It’s not a type of investment that can be left to itself. There are times that are just right to enter the market. People buy at dips and try to make the most of every opportunity to buy gold. Physical gold also has a very high liquidity which again increases its appeal as an investment asset.

Today we are in a position where gold is liked more as a hedge tool, an asset that gives you protection against uncertainties. And this characteristic of gold helps in keeping its prices high when there is a global crisis. In fact many are even switching over from equities to gold.

Though the first half of 2018 was dull for gold, it did gain momentum in the second half. 2018 on a weekly chart produced 2 clear trends, and some pretty nice ones at that. We started the year flat, and then had a bear trend from May to October, then a nice rally taking it up. If we’re just holding gold all this time, this really won’t matter, but gold still moves and we can’t call it a complete dog over all this time, even though it’s been one from a longer-term perspective.

This year too, till date gold is up 2% and is expected to rise further given the factors that will influence the yellow metal and create bullish sentiments in the market.

Since the high of February, with each lasting a week or two, gold is producing some pretty well-defined moves, including the current upward one.

But just by seeing the current trends it won’t be possible to exactly predict a future upward movement. We need to consider the past too. We at least need to preface this by mentioning the current bull move with gold, and you won’t really discover that by just looking at its year to date, you have to go back to the beginning of the current move in October. It’s not that we can go back in time and buy some then, but if we’re looking to predict a future up move, we need to at least account for how much we’ve moved up thus far.

The number in play here is $1184 an ounce, the low last October 1. This is also around the time where the stock market started to sink, and when money started to flow out of the stock market more, with some making its way into gold.

We’ve been able to sustain a move of 10% through the subsequent stock market rally, so while the bearish turn with stocks may have given us a push forward, the better performance of gold involved more than this, perhaps our looking to recapture the amount that the market oversold it by earlier in the year.

This is what makes us say that gold is expected to rise further. For 6 years now, gold has been unable to move up much past where it is now. This doesn’t mean that it won’t happen. A weak US economy, Fed policies, US China trade war, Brexit, piling gold reserves, bearish stock markets  are some of the many key influencers that will cause a wave in the market and bring about a rally in gold price.

Fed Continues to be a key driver for gold and dollar

Gold has been going strong since the mark of 2019. As we completed a quarter of the current year, gold continues to show the same sentiments as the second quarter began.  Gold prices rose to a more-than-one-week peak on Monday as the dollar slipped after data showed U.S. wage growth slowed last month, while investors awaited minutes of the U.S. Federal Reserve’s March meeting later this week.
Spot gold gained 0.4 percent to $1,296.87 per ounce by 0746 GMT, after touching its highest since March 29 at $1,297.86 earlier in the week.

Let’s have a look at each factor individually : 

Data - Soft data coming in from the US strengthened the yellow metal. Though the non-farm payrolls data was better than expected, the manufacturing jobs fell which is a bad signal for the sector and doesn’t show a very bright picture of the economic outlook. Marginally better Purchasing Managers’ Index (PMI) reading out of China over the weekend, along with the never-ending optimism about a trade deal, were touted as the reasons. Cyclical outperformed and the yield curve steepened, suggesting that recession fears sparked by the prior week’s inversion were overblown. A slightly better PMI in the US added to this better mood. Contrasting with the stronger soft data were weak retail sales in the US and evidence that inventory continues to build in the channel. Auto and home sales also remain fairly weak. Friday’s labor report was definitely good news and much better than last month. However, some of the leading data from that report, like temporary hiring, continued to soften and bear watching.

DOLLAR - The dollar was down 0.1 percent against key rivals as U.S. Treasury yields extended their decline after the U.S. jobs report signalled a slowdown in wage growth even as employment accelerated from a 17-month low in March. The dollar was also weighed down by softening bond yields. The greenback was 0.3 percent lower at 111.385 yen after briefly popping up to a three-week high of 111.825 on Friday following the U.S. jobs report.

CHINESE GOLD RESERVES - According to the latest Chinese reserve data, the country's gold reserves rose to 60.62 million ounces in March from 60.26 million a month earlier, according to data on its website. This was the fourth consecutive month of gold increases: last month’s inflow was 11.2 tons, following the addition of 9.95 tons in February, 11.8 tons in January and 9.95 tons in December. The recent buying spree resumed after a 25 month hiatus, as China stopped reporting gold purchases in October 2016. This trend broke in December, when Beijing announced it had once again started accumulating gold

RUSSIAN GOLD RESERVES -  The world's isn't sitting on its hands, as governments worldwide added a whopping 651.5 tons of bullion in 2018, the second-highest total on record, according to the World Gold Council, and nobody more so than Russia which quadrupled its reserves within the span of a decade amid President Vladimir Putin’s quest to break the country’s reliance on the U.S. dollar. The one country that has decided it will no longer be part of the USD monetary sphere of influence is Russia, which has been dumping dollars and buying gold at the fastest pace in decades.


Summing up the previous week and why gold rose or dollar fell, we can say - Disappointing European manufacturing data in combination with a more “dovish” Fed led the 10-year treasury yield to fall the most in two years and U.S. investment grade bonds to rise the most in four years. The Federal Reserve left interest rates unchanged, while signalling no rate hikes for the balance of 2019, acknowledging global uncertainty and muted inflation pressures. Markets responded favourably at first, with both bonds and equities rallying on the news, but the markets gave back these gains as the focus turned to what the Fed’s pause might mean about the underlying health of the economy. The Fed will likely continue to be a key driver of equity markets as officials negotiate the balance between rates, inflation and a healthy but slower-growing economy

Dollar dependency reduces. Benefits gold

Why is gold being reconsidered as a mode of investment globally? Why is the dollar dependency reducing? Why are central banks world over piling up their gold reserves?

Well the answer to this looks simple but the reasons behind it are quite complex.

There are so many things happening in the international markets. Gone are the days where just The U.S. economy played an important role in influencing world market. Today there are many other factors that are responsible for the movement of equities, commodities and other markets.

This week too, while the dollar strengthened against the British Pound, gold premium eased in China. Where we saw weakening imports of gold in China on one hand, on the other bullion reserves rose in Russia.

Dollar against the pound - The British Pound was the worst-performing, adding to losses after the UK Parliament was unable to reach a consensus for an alternative Brexit strategy.

Arguably the best-performing major on Thursday was the US Dollar, which climbed alongside rising front-end government bond yields. This is despite a flurry of disappointing domestic economic news flow. US GDP missed expectations, clocking in at 2.2% q/q in the fourth quarter of 2018 against 2.3% anticipated and from 3.4% in Q3.

The U.S. dollar benefited Friday from sterling’s slide after parliament for the third time rejected Prime Minister Theresa May’s proposed deal to pull Britain out of the European Union.

The pound fell as much as half a percent to the day’s low of $1.2976. Sterling’s move led the dollar index higher, last up 0.07 percent to 97.274, helping it recover from an earlier drop on the weaker-than-expected report of U.S. inflation data, which added to the conviction that the country’s economy is losing momentum.

U.S. economic numbers - U.S. consumer spending barely rose in January and income increased modestly in February. The report from the Commerce Department also showed price pressures muted in January, with a measure of overall inflation posting its smallest annual increase in nearly 2-1/2 years. Consumer spending accounts for more than two-thirds of American economic activity.
With growth slower and inflation benign, Friday’s data bolstered the Fed’s case for ending its three-year monetary tightening campaign.

Spot gold was up 0.7 percent at $1,298.80 per ounce by the end of the week, testing resistance at the key $1,300 level.

Bullion was also set to notch up about a 1.2 percent gain for the quarter, helped mainly by a dovish U.S. Federal Reserve and concerns about the global economy.

However, gold was still bound for a second consecutive monthly drop, losing about 1 percent, which would be its biggest decline since August last year. The metal fell by about 1.5 percent on Thursday, the most in more than seven months.

Premium - Gold premiums in China eased in the past week as worries about a slowdown in the world’s top bullion consumer prompted some customers to hold off on purchases, while a price dip buoyed appetite in other Asian hubs.

In China, premiums of about $12-14 an ounce were being charged over global benchmark prices, a slight reduction from last week when they rose to the highest since March 2017 at $14-$16.
The country’s net gold imports in February via main conduit Hong Kong fell 13.6 percent from the previous month.

Gold Reserves - Central bank buying has helped support gold prices in recent years. Bullion has risen 20% since the start of 2016.

Within the span of a decade, Russia quadrupled its bullion reserves and 2018 marked the most ambitious year yet. And the pace is keeping up so far this year. Data from the central bank show that holdings rose by one-million ounces in February, the most since November.

The data shows that Russia is making rapid progress in its effort to reduce its dependency on the US dollar and to diversify away from American assets. Analysts, who have coined the term de-dollarization, speculate about the global economic impacts if more countries adopt a similar philosophy and what it could mean for the dollar’s desirability compared with other assets, such as gold or the Chinese Yuan.

For Russia, experts are starting to question whether it can afford to keep up its intense pace of buying. Some say the country will import more gold to guard against geopolitical shocks and the threat of tougher US sanctions as relations between the two powers continue to deteriorate. Gold buying last year exceeded mine supply for the first time. Still, others argue that Russia’s bullion demand is set to slow.

But it’s not single handed Russia that’s piling its reserves. Given the constant geopolitical unrest, more and more banks are shifting focus to the yellow metal, which leads us to conclude that gold prices are soon to rise further.