Gold Is Still Very Reactive to Daily News

The increase in the price of gold is not only limited to US dollar; it is pretty much the same in virtually all major currencies in the world, Recently Indian Government has decided to increase import duty on gold. Our Managing Director- Prithviraj Kothari has advised the market to wait for more stability. There are quite a few reasons why the gold bull market might indeed have returned and that the latest price action is not just bubble.

Gold traders limited the range view before the testimony and were eyeing on $1390-$1392 once again as a final support.

Gold spent most of the week under $1,400 even though China added 10 tonnes to its reserves and Poland reported a large acquisition of 100 tonnes.

Wednesday gold moved decisively up to $1,426 on the back of Federal Reserve chair Jerome Powell's dovish comments at his semi-annual monetary policy testimony but then moderated with US inflation coming in above expectations overnight, although it has held above $1,400.

Spot gold rose 1.5% on Wednesday after Fed Chair Jerome Powell’s dovish remarks, where he confirmed the U.S. economy was still under threat from disappointing factory activity, tame inflation and a simmering trade war, and said the Fed stood ready to “act as appropriate.”

This statement weighed on the dollar. The U.S. currency against major other currencies extended declines for a second session.

All eyes were focussed on Powell over the past week as he presented his key semi annual monetary policy before the congress. What needs to be remembered is that it was a two-day testimony and maybe the last key event before locking the 28th- 29th July verdict. The extent of dovishness depended on change of words that he put on soon after the strong US payrolls.

On the second day of the testimony, Powell almost reassured that he is not changing the stance of June (which was dovish and rate cut prone) as he sees lot of headwind and slowdown especially the trade war-related tensions that are affecting the global growth. Morgan Stanley however thinks that the Fed will cut 0.5% on 25th July.

Gold prices fell on Thursday, erasing gains made early in the day after stronger-than-expected consumer inflation in the United States cast doubts whether the U.S. central bank will cut interest rates as aggressively as expected.

Spot gold dipped 0.85% to $1,406.8 per ounce, dropping nearly $6 after U.S. consumer prices demonstrated a pick-up in underlying inflation, increasing in June by the most in nearly 1-1/2 years.

The core U.S. consumer price index, excluding food and energy, rose 0.3% in June, data showed on Thursday, the largest increase since January 2018. The U.S. Federal Reserve had last month downgraded its inflation projection for the year to 1.5% from the 1.8% projected in March.

Bullion rates were quick to slump following the data, shedding nearly 1% in the latter part of its session, with the dollar erasing some losses.

Gold prices inched higher on Friday as investors shrugged off concerns that stronger-than-expected consumer inflation in the United States could influence the U.S. central bank’s decision on aggressive monetary policy easing.

Spot gold rose 0.3% to $1,407.31 per ounce as during trading sessions, having touched $1,412.20 earlier in the session.

Fed policymakers are scheduled to meet on July 30-31, where investors will look for further cues on monetary policy easing. Nonetheless, gold remains a valuable asset amid rising geopolitical tension, growing macro uncertainty and a maturing economic cycle. The market expects synchronous rate cuts globally, which will make non-yielding gold attractive for investors.

Gold is still very reactive to daily news but it is forming a trading channel of $1,380 to $1,440 and the longer this continues the better - the market needs to consolidate before attempting another leg higher, which we feel is the more likely outcome than it breaking back down.

BUDGET 2019

International markets didn’t witness much volatility as US market remained closed on 4th July over Independence Day.

Now there are 2 points to be noted-
Firstly, the US DOW is at life’s high at 27000 as the plunging yields are now at 1.94% US 10y. This indicates that the rate cut is bound to happen soon.

Secondly, the key number comes in from US payroll at 6.00pm IST. The Fed meet and broader expectation of 162k vs. last times 75k. Moreover, unemployment rate is expected to be at a decade’s high.

Till then market is expected to be trading in a narrow range.
As far as domestic markets are concerned, all eyes were on the much awaited budget, well named as Modi 2.0 budget.

A clean win this election for our respected PM Modi clearly indicates that the public has hopes with this government and expects it to work for the betterment of our country. Similar to these lines, the common man also had many expectations from this budget with respect to taxation, water managements, farmer loans and many other critical issues.

Even the gem, jewellery and gold industry had expectations that this budget would bring some relief to the sector where duty structure is concerned.

What was need was that the government should give a thought on how gold should be treated and how it should be classified into asset class. Once gold is classified into an asset class then other products like Mutual Funds, Insurance Fund, Pension funds should be allowed to invest into the yellow metal. The dollar rupee fluctuation can be hedged and interest rate can be covered on large scale.

Another need of the hour was to have a more organised gold market. Introduction of a trading platform/exchange to trade gold and all transactions should take place only on this platform. This would bring about transparency in its pricing, set benchmark prices and would benefit the end consumer on a large scale.

Gold has an import duty of 10 per cent, and market players wanted it to be pulled down to 4 percent to boost demand. But the government has proposed to increase the duty to 12.5 percent to mobilise resources. We need to wait and see how markets have accepted this rise in duty and what will be their reaction.

Key data shifts market sentiments

Last week a lot was happening for gold globally and in the domestic market. While there was important data released from the US, in the domestic market too all eyes were glued to the interim budget. While internationally, Fed rate hike is the topic of discussion, in India Gold duty cut was also being discussed strongly. We shall discuss the budget later.

Let’s have a look at the key economic numbers and how it affected gold and dollar.

• Nonfarm payrolls rose more than 300K, which was significantly better than the 165K forecast and matched December's +300k rise
• Manufacturing activity accelerated 
• University of Michigan Sentiment index was revised slightly higher for the month of January. 
• Stocks extended their rise. 

Not only does this report tell us that the government shutdown had limited impact on the labor market but after revisions, job gains averaged 241K over the past 3 months. However even though the labor market is on fire, wage growth is slowing and there's a very good chance of downward revisions next month. More importantly the change in the Federal Reserve's monetary policy statement is significant enough to keep the US dollar under pressure so don't trust the rally.

Although employment continues to expand, wage growth remains tepid. The report said that average hourly earnings increased 0.1% last month or by 3 cents, missing expectations. Economists were expecting to see wages increase 0.3%. For the last 12 months wages increased 3.2%. The U.S. dollar rebounded against all of the major currencies on Friday on the back stronger economic data.  A lot of the Fed's concerns stem from events like Brexit, funding for the US government and US-China trade issues that could be resolved over the next few months

The gold market saw some selling pressure Friday after the U.S. labor market showed strong growth in January, according to the latest government employment data. This sentiment continued as the week opened on a negative note for gold.

Gold prices dipped slightly on Monday as the dollar held steady on upbeat U.S. jobs and factory data that prompted markets to reduce bets on a rate cut later this year.

In the Indian markets, gold markets weren’t much active as while jewellers held off on purchases in anticipation of the country’s budget presentation on Friday.
India’s bullion industry has been urging a tax reduction to combat smuggling, which has increased since the country raised the import duty to 10 percent in August 2013 to narrow its current account deficit.

However, the interim budget presented by the Indian government on Friday did not include a change in the duty and hence not much activity was seen.
But India’s counterpart China, was showing a different t picture altogether. The demand for gold in China was quite on the rise.

On the occasion of Lunar year (which falls in the first week of February), generally, gold is considered as one of the best gifting medium. Demand for physical gold gathered usually increases in China ahead of the Lunar New Year holiday.
Another interesting gold purchase figure that saw record highs was from the central banks. 

Official gold purchases reached a new record in 2018 as central banks continued to diversify away from the U.S. Dollar.  Not only was 2018 a banner year for central bank gold purchases, but it was also the highest amount for more than five decades.  Central banks haven’t bought this much gold in one year since Nixon ended the convertibility of the U.S. Dollar into gold in 1971.

Despite the latest economic reports, the economy is still slowing but if Congress passes a permanent spending increase, the UK reaches a withdrawal agreement with the EU and the US forgoes further tariffs on China, 2 rate hikes this year could still be justified. With that in mind, any one of these discussions could go south, sending the markets into turmoil. Press conferences after every meeting this year gives the Fed the flexibility to change policy as needed and so far, domestic and global uncertainty justifies the need for patience. There's not much in the way of US data, so the dollar could resume its slide.