A very important week for gold

Although the gold market has struggled to attract the attention of general investors, the precious metal might not be as unloved as one would think.
The metal posted its biggest daily percentage gain in seven weeks on Friday after the dollar fell against a basket of currencies, as investors overlooked the strong economic growth in the United States to focus on the pain points.

Gold prices were mostly unchanged on Monday, trading near the more-than one week high touched in the previous session, on bets that the U.S. Federal Reserve might cut interest rate this year after a recent data showed inflationary weakness. Spot gold mildly eased by 0.1 percent to $1,284.31 per ounce at 0626 GMT, having hit its highest since April 16 at $1,288.59 in the previous session.

The main reason for rally in gold prices, were the important data numbers released from the US over the past few days.

• Data showed that U.S. first quarter growth of 3.2 percent was only motivated by the short term stimuli of a dwindling trade deficit and the largest accumulation of unsold merchandise since 2015 which may later weigh on the country’s economic picture.
• Core personal consumption expenditure price index figure, the Fed’s preferred metric of inflation, increased at only a 1.3 percent rate versus 1.8 percent in the prior quarter.
• About a third of economists polled by Reuters on April 25, already expect one real rate cut by 2020
• Lower interest rates in the U.S. put pressure on the dollar and bond yields, making greenback-denominated gold less expensive for holders of other currencies. It also increases the appeal of non-yielding assets such as bullion.


Apart from the data released, we now look forward to the series of events that are lined up. It’s going to be a very busy week ahead with the calendar packed full of market data and events across the globe.
From Monday 29th April to Friday 3rd May a host of data releases await the markets

• USD Employment Cost Index
• USD Chicago Purchasing Manager
• USD Pending Home Sales
• USD Consumer Confidence Index
• USD Pending Home Sales
• EUR ECB Vice President Guindos Speaks in London
• USD ISM Manufacturing
• USD ISM Employment
• USD Continuing Claims
• USD Non Farm Productivity
• EUR Euro Zone Producer Price Index
• EUR Euro-Zone Producer Price Index
• EUR Euro-Zone Consumer Price Index Core
• EUR Euro-Zone Consumer Price Index Estimate


Japan will be closed celebrating ‘Golden Week’ thinning liquidity in Asian hours, leaving markets vulnerable to ‘spike’ moves.

 In such conditions, gold would normally grab a bid but with the US dollar continuing to weigh on the precious metal, a neutral stance looks justified.
But all this doesn’t end here. These were the main data releases/events. A look at the calendar shows that there are a 28 ‘high importance’ data releases and events, all of which could change the risk landscape. A few highlights include, the latest interest rate decisions from the Bank of England and the Federal Reserve, the monthly US Labour report and various GDP and inflation releases across the Euro-Zone. Now we need to see how positively it affects the yellow metal or plays a spoiler instead.

Gold - A hedge tool against market risks

Last week gold witnessed a lot of volatility in the market but not much uptrend. It repeatedly failed to penetrate the resistance level of $1302 an ounce. And by the end of the week gold was expected to take a huge leap provided the US nonfarm payrolls data would have been way beyond expectations.
But nothing like that happened. In fact gold dampened post the data release.

Gold settled back below $1,300 an ounce on Friday, as upbeat monthly U.S. employment data buoyed the dollar and suggested that the Federal Reserve remains on track to raise interest rates later this month and later this year.

Relative calm also returned to Italian politics, a move also seen helping to pave the way for U.S. action on rates.

Data released on Friday showed that
• the U.S. created 223,000 new jobs in May,
• Unemployment was down to an 18-year low of 3.8%.
• Institute for Supply Management’s manufacturing index rose to 58.7%, up 1.4 percentage points from April and a two-month high.

Gold was pressured downwards due to
• Great job numbers
• lower unemployment rate
• increased labor participation rate
• ISM


This data can further help and support Fed officials to hike the interest rates again in June and further keep them on a gradual hiking place.

Rising real interest rates impact the opportunity costs of holding gold because the metal provides no yield, and entice investors to rotate into riskier assets like stocks. Higher rates may also boost the value of the dollar which usually moves in the opposite direction of the gold price.

Market players had expected European geopolitical tensions to influence gold prices and pull it across the $1300 mark, but it seems that gold will be having a tough time to scale that point.
Apart from the US data and other issues, gold is also being influenced by other global issues.
There is currently a wave of populism riding in Italy that is sure to bring more volatility to the markets, and with financial unrest comes a surge in gold.

Italy is experiencing a contagion problem around the build-up of debt that originated with the 2010 debt crisis.

In 2010, the concern was that most of the bad loans in Italy and Spain were owned by French and German banks, and the E.U. since then has escalated by 300% owning these bad performing loans," he said.

Mounting non-performing loans mean that credit default swaps may rise, and banks may opt to buy gold bullion as a hedge against market risks.

History says that trying to trade gold bullion as a political or short-term ‘safe haven’ is unlikely to pay. Smarter traders have in fact gone the other way over recent months, selling when the headlines screamed crisis and buying back when prices then eased. Or take the long view, and use gold to balance the risk of extended falls in the stock market.

It isn’t guaranteed to work. But that is how things have tended to play out for the ‘safe haven’ metal.