The time for Gold should come soon

Gold prices gained on Friday and were at weekly record gains, while the dollar also traded higher although it is still hovering near two-month lows.

The dollar fell to a nine-week low against a basket of major currencies on Thursday as investors shifted their focus from a trade row between China and the United States to the Federal Reserve’s monetary tightening plans.

Currency markets have become more settled since reacting strongly to new tariffs announced by Washington and Beijing on Tuesday.

The fall in dollar this week came as safe-haven demand for the U.S. currency ebbed amid continued relief that fresh U.S. and Chinese tariffs on reciprocal imports were less harsh than originally feared.

On Monday, the U.S. slapped tariffs of 10% on $200 billion in Chinese goods, before they rise to 25% by the end of 2018, rather than an outright 25%.
China retaliated by putting tariffs on $60 billion in U.S. goods. However, China will put a 10% tariff on some goods it had previously earmarked for a 20% levy.

Reports of the tariffs imposed by the U.S. and China on each other's goods being set at lower levels than expected were cited as headwind for the dollar prices, which is widely seen as safe-haven assets.
The dollar was also under pressure after a report said that the U.S. and Canada are unlikely to reach an agreement on NAFTA this week.

While trade disputes gained momentum, there was one more thing that has kept the markets on its toes. The next Fed meeting. Investors looked ahead to the next Federal Reserve policy decision to be announced on Sept. 26.

U.S. economic data has remained strong, and the dollar has tended to act as a safe-haven trade, gaining as tensions between Washington and Beijing escalate.

Markets currently expect the Fed to hike rates by a quarter of a point, while fed fund futures price in an additional increase at the end of the year at more than an 80% probability.

Looking ahead, markets would be paying close attention to next week’s Federal Reserve meeting. The U.S. central bank is widely expected to hike rates and discuss paths for future rate hikes. Higher rates dent demand for non-interest yielding gold and in turn boost the dollar in which it is priced.

The Federal Reserve is next week expected to raise benchmark borrowing costs and shed more light on its future rate path.

One more noteworthy thing that happened over the week was gold buying by Russian central bank.  As mentioned in my blogs earlier, the Russian central bank has been piling up its reserves and the latest figures released , stated that it has added a further 1 million ounces of gold (31.1 tonnes) to its reserves that month bringing the grand total to just over 2,000 tonnes as we suggested a month ago. It now has the holdings of Italy (2,451.8 tonnes) and France (2,436.0 tonnes in its sights to become the third largest national gold holder after the USA (8,133.5 tonnes) and Germany (3,369.9 tonnes) – all figures as reported to the IMF.

Russia and China are both believed to by buying gold as they feel the yellow metal will have an important role to play in the ongoing development of the global financial system. Russia and perhaps China too, are also believed to be buying gold, amongst other moves, to reduce their dollar-related forex holdings.

All these considerations suggest one thing- . Gold should shine not only due to the lower real interest rates and as an inflation-hedge, but also as a safe-haven asset hedging against the potential overshooting by the Fed.  We don’t expect any major financial crisis or that there won’t be a rate hike—what we think keeping these considerations in mind- the time for gold should come soon.

3 types of rates influencing gold

Gold lost its luster this week, as it touched to one year lows. Spot gold, which is down over 6 percent this year, is close to a one-year low of $1,211.08 touched on July 19 as the dollar powered to a one-year high on expectations of higher U.S interest rates this year.

Gold prices dropped as trade tensions between the U.S. and China resurfaced a day after the Federal Reserve affirmed its intention to lift rates further in 2018.

Gold prices declined as US Treasury bond yields advanced alongside the US Dollar in anticipation of a hawkish Fed monetary policy announcement, sapping the appeal of non-interest-bearing alternatives. Crude oil prices likewise fell as the stronger greenback applied de-facto pressure on assets quoted in terms of the benchmark currency .

The Fed on Wednesday upgraded its assessment of the U.S. economy and hinted at another interest-rate hike as soon as September.

Rising trade animosities between Washington and Beijing were in focus on Wall Street, as the Trump administration threatened to more than double proposed duties on $200 billion of Chinese goods to 25%, up from an original 10%.

Interest rate hike and escalating trade tensions are giving the U.S. dollar more buoyancy in recent trade, weighing on commodities pegged to the currency.

That has weighed on global stock markets but has provided the U.S. dollar a lift, as global trade tensions have recently flared up.

Rates remained unchanged as widely predicted, the statement released following the meeting of the policy-setting FOMC committee sounded decidedly confident on growth and inflation prospects. That bolstered the probability of a fourth rate hike in 2018 to 58.8 percent, up from 56.5 percent recorded a week earlier.

Investors betting on a stronger U.S economy and higher interest rates have sought out the dollar, sapping any benefits gold and other so-called “safe havens” might have gained from global trade tensions between the world’s largest economies.

Some analysts and fund managers say the dollar has benefited because the U.S. economy would be more resilient in the face of a trade war.

Gold is now fighting varied types of rate. One side it’s the interest rate from the Fed, on the other side it’s the import rates and thirdly the Bank of England rates too. Now all these clubbed together will life gold prices or pull it down- we don’t know- but these combined will definitely influence gold prices significantly.

Trade war fails to weaken the dollar

Gold prices have not managed to stay above the $1300 level- it could be due to a strong dollar or maybe profit taking or even price manipulation. Currently, out of all, gold prices seemed to have been highly influenced by a strengthening dollar.

Gold prices fell to new 2018 lows against a rising Dollar on Tuesday in London, hitting $1274 per ounce as President Trump threatened to hit back at China's retaliation over last week's new US trade tariffs with extra charges on another $200bn of Chinese imports.

Accused of "blackmail" by Beijing, Trump says these extra 10% tariffs will only come into force if China “refuses to change its practices."

This news gave a boost to gold in the Asian markets.

However the metal failed to extend further as offers [to sell around] $1283 restricted top-side gains.

Gold remains bearishly offered, and it’s all about the dollar strength as the greenback rockets higher on EM commodity and the China meltdown. And at least for the time being the markets have utterly forsaken the idea that the US trade war escalation could become ultimately detrimental for the dollar.

Now currently the matter of concern is that why is the dollar showing sign of strength despite an apparently escalating trade war which is unlikely to do anyone any good?

At the moment the dollar strength is two-fold. Key currencies like the Euro, the British pound, the Canadian and Australian dollars and the Chinese Yuan are being driven downwards (hence the dollar appears to be rising), but also money will be flowing into the dollar as perhaps more of a safe haven in times of an ensuing global financial crisis than gold and other precious metals.  We think that this will only be in the short term and we need to wait for some concrete events that will bring in volatility in the markets.

Gold expected to rise moderately

While gold has primarily been stuck within the US$1,310 to $1,350 range this year, it managed to rise 3.61 percent during Q1 2018.

The yellow metal gained some first-hand experience in market volatility during the period, as inflation gave it boosts while US Federal Reserve interest rate hikes brought pressure down
On the other hand, United states willingness to resolve an escalating trade fight with China, pulled back gold prices from one week highs reached in the earlier trading sessions.

The United States voiced willingness on Wednesday to talk with China after Beijing retaliated against proposed U.S. tariffs on $50 billion in Chinese goods by targeting key American imports.
As investors pulled out of gold, Asian equities rebounded from two-month lows with investors hoping a full-blown trade war between the world’s two biggest economies can be averted.

Spot gold was down 0.3 percent at $1,329.11 per ounce by 0409 GMT, after touching a one-week high of $1,348.06 on Wednesday.

But what looked like an eased out situation, became a bit tense after economic numbers came in from U.S. Gold prices rose on Friday, as Wall Street stocks tumbled and the dollar fell as rhetoric from U.S. President Donald Trump and Chinese officials fed worries about a possible trade war, and after U.S. jobs data came in weaker than expected.

U.S. stocks fell, with the Dow down more than 450 points, after Trump on Thursday threatened to slap $100 billion more in tariffs on Chinese imports, and Beijing pledged a “fierce counter strike”.
Falling stock prices dragged the dollar against the yen and the euro. Also pressuring the U.S. currency was data showing the U.S. economy in March created the fewest jobs in six months, which might prompt the Federal Reserve to go more slowly on plans to raise interest rates.

An intense trade war between US and China kept gold exposed to fluctuations. And hence the market is paying very much attention to the dollar and bond market in terms of what the Fed is going to do.
While any escalation in geopolitical tensions will raise the demand for the yellow metal, we already see an increase in the demand from the Indian markets.  Though demand for gold in whole of Asia was muted, there is a slight pick-up in buying in India ahead of the wedding season and a key festival.

This month Indians will be celebrating the annual festival of Akshaya Tritiya, when buying gold is considered auspicious.

Moving back to global worries, gold in the near term is exacted to raise moderately – Reasons being

• A weakening US dollar: A tightening monetary policy in Euro zone will result in the US dollars downtrend. And changed in the US fiscal policy will also have negative effect on US dollar, thus proving to be positive for gold.  The US dollar’s downtrend will resume later in the year. “One key reason behind this is the impending tightening of monetary policy in the Euro zone, given that the euro accounts for nearly 60% of the dollar index,” the report states. It also mentions changes to US fiscal policy, which could have a ripple effect on the US dollar yield curve.
• Volatility in equity markets. - The markets are too optimistic and bullish for equities and this over confident attitude could backfire, resulting in spiking gold prices.

These not so extreme, but moderately influential factors might spike gold prices in the near term but not to a great extent.