Gold preserves your wealth

In 2018, gold fought against significant demand for traditional stock and mutual fund investments and weathered tremendous exchange-traded-fund outflows. Gold has been under pressure from a stable and slightly appreciating U.S. dollar. Still, gold has shown incredible resilience all year – especially through the first three quarters.

It rallied at year-end, suggesting a flat or slightly positive trend year over year. Much of this is due to the increase in central bank buying from countries like Russia, China, Turkey, Kazakhstan, Poland and others. It’s all part of a larger move to reduce U.S. dollar reserves in favour of gold.

In 2019, it looked as if gold was cashing on the struggle that it faced in the previous year. Gold prices have risen more than 12% since touching more than 1-1/2-year lows in mid-August, mostly on expectations of a pause in Federal Reserve rate hikes.  Investors have shifted their sentiments from bearish to bullish for the yellow metals over more than one reason-

Data - Soft data released from important economies has created a favourable situation for gold.  Gold and the U.S. dollar, both considered as safe-haven assets these days, gained on Friday in Asia following the release of weak U.S. retail sales and China inflation data.
The precious metal attracted some safe-haven bids last week after the Commerce Department reported U.S. retail sales tumbled 1.2% in December. Economists had forecast a gain of 0.1% for the period.

In Asia, China’s January Consumer Price Index (CPI) and Producer Price Index (PPI) both missed expectations, the National Bureau of Statistics reported on Friday, furthering dampening investor sentiment.

Elsewhere, reports that China and the U.S. have not been making much progress during trade talks this week also supported the yellow metal

Volatility - First, the increased volatility in international markets due to global and economic instabilities will foment the safe haven flows that began in 2018. And gold has a historical record of being a safe haven asset in times of uncertainties thus raised demand for the yellow metal and further pushing its prices.

Fed Rates - Lower rates are disadvantageous to interest-bearing assets such as the dollar, but work in favour of commodities like gold that offer a store of value to investors.

Alternate modes of investment - Alternative assets competing for your investment dollars are not expected to perform well in the coming year. The stock market should continue its descent, either with or without a last hoorah. Interest rates should stabilize in the coming year, so term deposits will continue to generate no real return. Bonds will not be attractive compared with gold.

Central bank buying - time and again central banks have been piling their reserves to reduce their dependency in the US dollar. This once again opens a green window for gold.

Gold’s characteristics - Gold may not give you income but it definitely preserves your wealth. It’s like taking insurance for your finances. And it is expected to play this role to its best in the following months,
Finally, unlike Most investors are waiting to see whether the anticipated rise in gold prices is for real. For them, a breach to the upside of $1,350 per ounce may not be enough. Most will look for confirmation of the breakout above $1,400 an ounce.

 In each of the last three years, gold has gotten off to a strong start only to fizzle as the year moved along.  A good many investors, fund managers and analysts think that 2019 might very well be the year when gold breaks the restraints and pushes to higher ground.

Our own view is that gold is due for a rise and most portents are favourable, but the yellow metal is pretty unpredictable in its price pattern.  Overall it serves as a good wealth protector and as catastrophe insurance.  We are not of the ilk predicting a rapid rise to $10,000 - it may get there eventually but probably not in many of our lifetimes.  However there’s enough geopolitical uncertainty around to carry the price back into the $1,400s this year should some of the more worrying scenarios come about.

Gold has not Lost its lustre yet

Gold was at a life time high of $1921 an ounce in September 2011 when the US Federal Reserve was concluding its bond buying program (QE). During that period gold was everyone’s favourite metal. But by the end of 2015, gold prices declined to $1046. Sometime around that, the Federal Reserve, led by Janet Yellen has raised its key interest rates for the first time in 7 years. That’s the reason gold plunged. But now it seems that gold is finally emerging from an 8 year bear market. And that’s the reason we feel that gold has not lost its lustre yet.

They say that gold has an inverse relation with the dollar. When the dollar is strong gold is weak and vice versa.

It seems that gold has finally made a comeback and there are many factors responsible for this -
Gold seems to be driven by the fact that the current political standoff in Washington will lead to an escalation in crisis. Further the longest government shutdown in U.S history along with a gradually growing economy and rising global debt levels will add fuel to the fire. And when geopolitical issues are mentioned we can’t ignore the fact that the trade tensions between US and China have not been resolved yet. These factors strengthen the speculation of a push in gold prices.

Even though the dollar was up during the week, markets still prefer to stay loyal to gold.

Market watchers say the dollar may also come under pressure as the U.S. government shutdown begins to weigh on domestic growth. Having said that, gold prices are bound to rise.

Investors mantra - Stay Calm

Gold has lost around $30/oz. in less than one week as the US dollar charge continues. Last week’s FOMC meeting confirmed that US interest rates will continue to climb this year and next, while the Democrats’ victory in the House of Representatives is being taken as a USD positive so far, as it makes US President Trump more accountable for his actions. The precious metal was also unable to pick up a risk-off bid after US and Asian stock markets crumbled overnight on tech - mainly due to Apple - and worries that US-China trade wars may escalate.

Apart from the above mentioned acts, the way things are going- default concerns and inflation expectations are rather low by historical standards. As a result, financial markets could take a hard hit if investors ever wake up and demand a higher price for accepting credit and/or inflation risk. Such a scenario could make holding gold a particularly interesting option.

The recent weakness in gold is not over. In fact, we are worried about another leg down getting underway. While some believe that gold is moving to the bears there are some players in the market who still believe that gold prices will rally in the near future. Long term investors and speculation are making a shift from a bear to a bull market. Their belief is strongly supported by a few factors which these market players expected to occur soon-

• First and foremost, the current gold price does not seem to be high and there is a lot of scope for recovery till it reaches its all time high
• In a risk-on scenario, there is a good chance that the gold price will move up
• Bargain hunting and weakness in equities, such as the sharp fall in U.S. stock market on are helping put a floor under gold during the metal’s recent slide. The fact that gold has not fallen further “is probably due to the correction on the stock markets, which has made gold attractive as an alternative investment
• Oiling of gold reserves is a clear indicator that central banks do not want to be dollar dependent. A gold driven economy will definitely raise the demand for the yellow metal and furthermore its prices.
• Gold is the only financial asset that’s not simultaneously somebody else’s liability. Hence the liking for this metal always remains high.
• With uncertain world financial assets, there’s an excellent chance there’s going to be a volatile markets and hopefully a one that favors gold.

Currently we see investors acting very calm in the market. Maybe they await a strong and concrete signal from the global markets to get back into action mode.

Portfolio Allocation Towards Gold Increases

Lately there was a lot of discussion going around on the following issues- is it the time to buy gold? Will gold gain its safe haven appeal? Will investors continue to favour gold?

Well past few days gold gave all these answers. Since last Thursday gold has been in a positive mood, rising constantly and showing the hangover effects in the current week too.

Gold gained as global stock markets suffered from broad declines on Thursday. Major U.S. stock indexes headed lower Thursday, as well, failing to recover from Wednesday’s plunge.

Gold prices edged higher on Wednesday as some investors sought refuge in the precious metal after the global stocks tumbled and the U.S. dollar weakened. Spot gold rose 0.4 percent to $1,194.12 per ounce during late trading hours.

Continuing with the same behavior in the current week, Gold rose more than 1 percent on Monday to its highest in about 2-1/2 months as investors sought refuge in the metal after mounting tensions between Western powers and Saudi Arabia compounded jitters in global stock markets.

Spot gold was up 1 percent at $1,230.05 per ounce later in the day; having touched it’s highest since July 26 at $1,233.26.

There were varied reasons responsible behind gold gaining its glitter. Namely- 

Global Equities - Stocks on major world markets fell to a three-month low, with the benchmark S&P 500 stock index falling more than 3 percent, in its biggest one-day fall since February.  This created panic amongst investors.

Global stocks were under pressure, with European shares hitting 22-month lows on the back of a raft of factors including a U.S.-China trade dispute, rising tensions between Saudi Arabia and western powers, stalled Brexit negotiations and concerns over an economic slowdown in China.

Global Risks - the International Monetary Fund said last week that risks to the global financial system, which have risen over the past six months, could increase sharply if pressures in emerging markets escalate or global trade relations worsen.

Dollar - The U.S. dollar index retreated from a seven-week peak hit in the previous session. The dollar, a key driver for the precious metals, weakened against its currency rivals. Another haven market, however, U.S. Treasury bonds — chief among culprits influencing rickety stock trading of late — drew their own fresh demand Thursday, halting for now the rise in yields that spooked stock investors.

U.S. Stocks - Gold prices surged Thursday to the highest in more than two months, with the metal’s haven status in full force and attracting investment interest amid a sharp retreat for U.S. stocks that has infected foreign indexes

China's gold reserves - the markets were awaiting these figures post the Golden week holiday. Once the numbers were out, the market didn’t wait much to react. The official gold reserves in mainland China have grown from 1,054 tonnes in the first quarter of 2015 to 1,839 tonnes in the third quarter of 2016, to 1,843 tonnes in the second quarter of 2018. The demand for gold among Chinese consumers also rose by 5 per cent in the second quarter from a year ago to 144.9 tonnes. Demand by Indian consumers declined in the same period by 8 per cent to 147.9 tonnes.

The market for gold bars and coins has also been boosted by China and Iran, as they seek to hedge against geopolitical tensions with the United States.

We all know that the rate hike has strengthened the dollar against major basket of currencies. This fall in other currencies against the dollar has had an adverse effect on some of the Administration’s tariff impositions.  Some U.S. manufacturers are already warning that the tariffs on Chinese goods in particular will have an adverse impact on input and consumer prices. If equities are seen as likely to fall further this could see an increased move towards safe haven assets like gold and silver.

We don’t know how far gold will stay or stabilize here, but for the time being gold has definitely given us investment goals. And with the markets gold down, people have increased their allocation towards gold.

Think Positive

Whenever gold tries to move up, the market starts doubting its behaviour. The gold price did manage to end the past week above $1200 mark.

Gold prices rose on Friday following a monthly U.S. employment report falling to its lowest level in a year.

Spot gold rose 0.3 percent at $1,202.40 an ounce. It had gained 0.6 percent so far for the week, on track to mark its biggest weekly gain in six.

Data coming in from the US was responsible for this positive trend in the yellow metal-

• Non farm payrolls rose just 134,000, well below Refinitiv estimates of 185,000 and the worst performance since September 2017 when a labor strike weighed on the numbers.

• The unemployment rate fell two-tenths of a percentage point to 3.7 percent, the lowest since December 1969 and one-tenth of a percentage point below expectations.

• Augusts’ initial count was revised up dramatically, from 201,000 to 270,000, while July's numbers came up as well, from 147,000 to 165,000.
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• The revisions bring the three-month average growth to 190,000 while the 12-month average gain is 201,000.

But the question once again was how far will it stay here? Will it move forward or once again it will turn down to its low of $1183?

Despite the weekly gain, gold prices have fallen more than 12 percent from a peak in April largely due to strength in the dollar, which has benefited from a vibrant U.S. economy, rising U.S. interest rates and fears of a global trade war.

The fear is that the rising dollar is going to cause a huge rout in the emerging markets and investors want to hedge that risk

Recently gold has been hovering between $1190 and $1210, not being able to cross these marks – neither upside nor downside.

The reason being- if there are 2 drivers for gold prices then on the other hand you would find 4 more factors are that ready to pull it down.
Currently some short term influencers are making it difficult for gold to amend its behaviors.

One of the strongest influencers for gold as of now is the US dollar and the US economy which are totally relative to each other.

Dollar has remained strong for quite some time. The US economy is also believed to be moving gradually on a positive growth path, which has further initiated the Fed to raise its interest rates in December. Moreover, it’s expected to bring in few more hikes in 2019 too.

What further raises interest is that the current trade war between US and Chine is acting positive for the US economy?

There has also been some settlement in terms of the rehashing of NAFTA as the USMCA (U.S., Mexico, and Canada Agreement which promises trade stability between the three North American nations, although when the small print is examined in detail it may leave the participants unhappy with the likely outcome.

Gold ETF saw huge withdrawals and equities markets displayed new records. All these clubbed together has been a big reason behind gold’s current behaviors. Even in this wary situation, some players are still holding positive sentiments for gold.

And one of the main reasons for this is central banks. Central banks across the world are hoarding gold amid growing fears about global volatility and a possible downturn for financial markets.
They have snapped up almost 275 tons of gold this year alone – 8 per cent ahead of 2017 – at a cost of more than £13 billion.

Many national banks have been returning to the market for the first time in years. India bought eight tons, its first purchase since 2009

Furthermore, if funds start moving back to the ETFs that would be a good sign that we could be at a turning point.

Gold believers have a strong faith in this safe haven asset and are waiting for it to rise in the long term as there are many positive things waiting to occur which will create a constructive impact on the yellow metal.

• U.S. total debt and monthly deficit seems to be accelerating
• Central bank gold buying appears to be increasing;
• The dollar may be in the process of being downgraded as the world’s reserve
• And precious metals demand appears to be rising in the key Asian and Middle Eastern markets

So gold is being pulled between the bears and the bulls of the short term and long term futures.

Much of the volatility will depend on the dollar and in case the dollar starts losing its global presence then gold price in the dollar terms is expected to rise,

Not forgetting the other geopolitical factors. Gold investors are very much positive for gold in the long run and believe that though it will hover around the $1200 mark for the time being, but will soon rise.