Gold benefits from equity slide

Reserves Reserves Reserves - it was all about piling up gold in the past week. And when I Say piling I mean in huge numbers.

Peoples Bank China shocked the world when it’s released the figures of gold reserves that it sits on.  China's gold reserves had been steady at 59.240 million fine troy ounces from October 2016 to November 2018, according to data from the People’s Bank of China, and suddenly jumped to 59.560 million fine troy ounces at end-December.

The People’s Bank of China increased holdings to 59.56 million ounces by the end of December, or about 1,853 metric tons, from 59.24 million ounces previously, according to data on the central bank’s website. They had been unchanged since about 130,000 ounces were added in October 2016.
China has long been wanting to reduce its dependency on the US dollar. The ongoing trade war is threatening its economic growth.

Several large emerging economies, which today fuel most of global growth prospects, and major oil exporters, are intrigued by the idea of re-coupling gold with a multilateral currency basket to avoid excessive exposure to US dollar-denominated energy and commodity markets.

 Spot gold had its strongest month in almost two years as those fears spurred a whirlpool in equities and the dollar and boosted demand for the precious metal as a haven. And hence the world’s biggest producer and consumer boosted holdings of bullion.

But it was not an overnight thing. China has been piling reserves since quite some time. It had last released the figures in 2016 and now suddenly. And it’s not just China that has been doing this.  As Bloomberg reports, Poland and Hungary surprised the market in 2018 by adding to their gold holdings for the first time in many years.

Furthermore, there have been interesting shifts in gold reserves. While advanced economies, such as the US and Germany, still own most global gold reserves, the US has increased its gold holdings in the past decade only marginally, while Germany has been forced to cut its reserves. In contrast, China has tripled its reserves, while Russia has nearly quintupled its gold (after dumping billions of US Treasuries), despite rounds of sanctions.

Fresh comments coming in from Federal Reserve Chairman Jerome Powell on Friday, got in a fresh rally in gold prices. The statements released boosted the chances that the central bank will pause interest-rate increases. Speculation that the Federal Reserve may pause its interest rate hikes has given further strength to gold’s rally into the new year and assets in bullion-backed exchange-traded funds are at a seven-month high. Spot gold was trading 0.5 percent higher at $1,291.83 an ounce as the week ended. Strengthening of the yellow metal has further weakened the greenback.

Gold was out of favour for much of 2018 as a result of the strong dollar and interest rate increases in the US. The precious metal traded as low as $1,174 an ounce in August, despite rising geopolitical tensions.

However, sentiment began to improve towards the end of the year, as volatility increased further and US stocks suffered.

THOSE analysts who believe that fear has made a comeback argue that gold is benefiting as equities slide and investors are increasingly concerned about the economic prospects of the United States (US), China, Europe and Japan. Yet, even at $1,290, gold still remains more than 30 percent behind its all-time high of $1,898 in September 2011 amid the US debt-limit crisis.

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.
   

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.

Gold - A Store of Value

Though gold headed for its first weekly drop in six week, it remained in the positive territory - thanks to U.S uncertainties, Bitcoin crisis, ECB hawkish comments to name a few.

Spot gold has declined 0.5 per cent so far this week, its worst week since early December.

Spot gold was up 0.4 per cent at $1,332 an ounce by 0659 GMT. On Thursday, it touched its weakest level since Jan. 12 at $1,323.70, having fallen from recent four-month highs.

Amid worries of a possible US government shutdown, the dollar weakened and gold strengthened with prices rising higher on Friday. Legislation to stave off an imminent federal government shutdown encountered obstacles in the US Senate late on Thursday, despite the passage of a month-long funding bill by the House of Representatives hours earlier.

Legislation to avoid a US government shutdown at midnight on Friday advanced in Congress, as the House of Representatives on Thursday night approved an extension of federal funds until February 16, although the bill faced uncertain prospects in the Senate.

The dollar has fallen since 2017 largely on expectations central banks besides the Federal Reserve are seeking to end their policy of ultra low, even negative, rates that they adopted to combat the 2008 global financial crisis and the recession that followed.

Furthermore, reacting to ECB’s hawkish language, gold prices rose during Asian morning trading hours. The yellow metal gained momentum as ECB’s December meeting minutes and soft US data weighed on the dollar.

ECB’s December minute were claimed to be hawkish due to a discussion of a gradual shift in guidance from early 2018 - much earlier than had previously discussed.

A disappointing US data lowered the dollar. The dollar index was down by 0.5% at 91.81 as of 11:57 am Shanghais time.

The December Producer price index fell 0.1% against an expected increase of 0.2%
Unemployment claims rose to 261,000 this week. Marking the fourth consecutive weekly increase and a more-than-three- month high.
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As mentioned above, another reason that has favored the rise on gold prices is the much hyped Bitcoin. Is it a bubble or a boom? Bitcoin, the world’s most popular crypt currency, has seen a major correction, losing over 40 percent of its value in less than a month, prompting investors to dump the crypt currency in exchange for the precious metal.

As of this writing, the cryptocurrency, which skyrocketed from below $1,000 in early 2016 to the historic milestone of $20,000 in December 2017, was hovering around $11,600 per a coin, according to CoinDesk. On Wednesday, the price of Bitcoin dropped to $9,400 at one point.

Currently Bitcoin look quite uncertain. It was easy to get into it but now investors are finding it difficult to come out. AS we see that currently with Bitcoin and dollar facing a decline in vale, gold on the other hand ahs rallied 7.5% in the past month and also carries with itself a history of being a safe haven asset and a store of value.

2018 kicks off a good start for gold

Recent weeks have shown strong rallies for precious metals and its looks like ass id prices are now consolidating. There may be a pull back in prices over a strengthening U.S dollar, but the rebounds since mid-December show that the sentiments for precious metals, especially gold, has turned more bullish. Once again the yellow metal has found place in an investor’s kitty and these commodities are back in vogue again.

Last week we saw gold prices rising during Asian trading hours on Thursday, 11th Jan after the dollar continued to drift lower following news that Chinese officials have recommend the country slow or halt its purchase of US bonds.

The yellow metal benefited for reasons more than one over the past week and its effect continued to spread in the current week too.

• The important data that weighed on the dollar and other global news that benefited the yellow metal-
• The December produce price index fell 0.1% against an expected increase of 0;2%
• Unemployment claims rose to 261,000 in the past week marking the 4th consecutive weekly increase and a more than three month high.
• The dollar remained soft after important news was released from China regarding US bind purchase on Thursday. This kept the dollar on the defensive which ultimately benefited the yellow metal.
• Hawkish language contained in the ECD December meeting minutes pushed gold prices further on Friday
• What added to the rally was a soft US data that released on Friday. This weighed on the dollar and pushed gold prices higher.
• A disappointing US data further raised negative sentiment for the dollar. The weak dollar amidst increased demand for equity market hedge has made the environment even more glitter for the shining metal.
• Adding a touch of bullishness to gold was data from the U.S. Commodity Futures Trading Commission on Friday, which showed hedge funds and money managers raised their net long positions in COMEX gold and silver in the week to Jan. 9.
• U.S. President Donald Trump on Friday delivered an ultimatum to European signatories of the deal to fix the “terrible flaws” in the agreement with Iran, or the United States would pull out.
• Iran’s president said on Sunday the United States had failed to undermine a nuclear deal between Tehran and major powers, and hailed the accord as a “long-lasting victory” for Iran, state television reported

A weaker U.S. currency makes dollar-denominated assets such as gold cheaper for holders of other currencies, while higher rates could dent demand for non-interest-paying gold.

The global spill over effect was seen in the domestic markets too. In the national capital, gold of 99.9% and 99.5% purity advanced by Rs100 each to Rs30,750 and Rs30,600 per 10 grams, respectively — levels last seen on 18 November.
 Apart from positive global cues, buoyed by a slump in the dollar, sustained buying by local jewellers at the domestic spot market kept gold prices elevated

Summing it up, gold has moved up sharply in dollar terms in the past few days despite mixed economic data out of the USA. So gold investors should treat the latest rise in the gold price purely as a wealth protection exercise.  That is what gold is good at over time.  If the dollar declines further then gold will rise further, as will all the major precious metals – and most other commodities too.