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.

Wait and watch approach

Gold was down last week till Wednesday but again gained momentum on Thursday. It saw a sharp rally from Wednesday’s bottom but pulled back once again on Friday.

In 2018, gold was highly influenced by a wide variety of factors -

• Brexit
• Election of U.S President Donald Trump
• Geopolitical events
• US China trade war
• Global equities
• Iranian Sanctions in Venezuela
• Midterm elections
• Cyber attacks
• Collapse of peace talks with North Korea

These all have the highest likelihood of impacting markets in 2018 and 2019 and thus creating volatility which will likely bring about a rally in gold prices.

Since these series of events are either on going or about to happen, markets player are now following the wait and watch approach.

US midterm elections will definitely have a major impact on global currencies and assets across all classes. Hence investors and traders are not being much active and are waiting for something concrete to occur as Midterm elections may stimulate safe-haven buying,”

Interestingly gold has not only bounced, it has shown this behavior in spite of stability in the dollar. Gold is expected to rise further

Interestingly, gold, largely left for dead, has rallied. Not only has gold bounced, but it has done so despite a steady dollar. Which raises the question: Why is gold rallying now? Here are some potential reasons:

Steady dollar - While the DXY Index is pushing against the upper end of its five-month range, the dollar has been relatively stable since May. This is important as a rapidly strengthening dollar, as we witnessed last spring, has historically been a headwind for gold.

Inflation - Besides the dollar, the biggest challenge for gold in 2018 has been rising real rates, i.e. interest rates after inflation. Higher real rates raise the opportunity cost of an asset that produces no income. Between January and early October, real 10-year yields advanced by 50 basis points. However, since then, real rates seem to have temporarily peaked near the levels reached in 2013 and hence its stability will bring in a rise in gold prices.

Volatility - While real rates and the dollar are key fundamental drivers for gold, demand for a hedge against volatility also drives gold prices. With the exception of the brief correction in February, that attribute has not been in demand until recently. Prior to the recent swoon, U.S. equities were well on their way towards another year of double-digit gains. Unfortunately, this pleasant trajectory has been interrupted. Equity market volatility has doubled since early October. This is important, as gold has a history of performing best versus stocks when volatility is spiking.


These factors have historically proved that in such a volatile environment gold always acts as a safe haven asset and a hedge tool. Give this characteristic of gold it’s obvious that any minor crisis will also bring about a rise in the demand for the yellow metal which will further push the prices higher.

Moving to the domestic markets, sales have dampened this Diwali. Physical gold demand in India was lacklustre this week, with dealers offering discounts for the metal ahead of a traditionally busy festival week for the first time in at least three years, as high prices kept consumers away.

Prices in India, the second biggest gold consumer after China, held near 33,000 Indian rupees per 10 grams, the highest since September 2013, ahead of the Dhanteras and Diwali festivals next week, when buying gold is considered auspicious.

This Dhanteras, jewellers and bullion traders witnessed a drop in demand. Retail buyers are not interested in buying at this level. Furthermore, The Indian currency has lost more than 12 percent of its value against the U.S. dollar so far in 2018, making purchases of commodities denominated in the greenback more expensive.

Post Diwali, jewellers still have hope of a rise in the demand during the wedding season.
Like global investors and markets players, jewellers in India too are following this approach- to wait and to watch.

Get ready to see Gold on a roller coaster ride

While in the domestic markets we saw jewellers preparing in full swing for Akshaya Tritiya, in the global markets we saw gold moving in full swing.

Jewellers are expecting 15-20 per cent increase in sales this Akshaya Tritiya, mainly on the back of positive market sentiment, stable prices and ongoing wedding season.

Apart from the auspicious occasion of Akshaya Tritiya the wedding season is also lined up for the month of April, May and June, which has raised the demand for gold further. As buyers expect further rise in gold prices, they have started making their purchases to avoid any further price rise.

Overall there is a positive sentiment in the market so a sales growth of 15-20 % is expected this Akshaya Tritiya.

Globally so far, gold has risen more than 3 percent this year, marked by international tensions and volatility in equities, but has yet to emerge from a tight trading range in the face of an expectation for rising U.S. interest rates.

Prices for gold this week rose to their highest levels since Jan. 25, as escalating tensions in Syria, U.S. sanctions on Russia and the U.S.-China trade stand-off weighed on global equities and the U.S. dollar index.

Gold's safe haven status was tested this week as Donald Trump's economic war threatened to turn into a shooting war, with a number of global spots getting hotter. Precious metal moved from a close of $1325.69 an ounce on April 5 to $1337.90 on April 12, dipping on Thursday after reaching a high of $1364.50 during Wednesday morning trading – the highest it's been since Feb. 14
So far, Gold has also outperformed all other precious metals this year.

The headlines this week have been full of escalations of continuing and new conflicts around the world. Here is a rundown-

Trade Wars- Countries over the world are now dependent on each other for exports and imports.
Many major American companies that are household names such as Starbucks (SBUX), Boeing (BA) and Apple (AAPL) rely on their exports (and imports) from China for a sizable portion of their overall sales and profits.

But the escalating trade war between China and US could hurt the revenues of these companies as each country is retaliating with its own harsh measures.

But there are news revolving in the markets that has China just recently launched a new $1.6 billion initiative called “Made in China 2025.”

This initiative would focus on an increase in research and development spending thus making China more self dependent which will further help companies to rely less on international technology and equipment. The more China buys internally, the less it will buy American products or need to export to the U.S.

That means it could shift its trade focus away from the U.S., while purchasing fewer American goods. All of that could hurt manufacturers in both countries and increase volatility into the share prices of companies involved.

Geopolitical- There is rising tensions on the geopolitical front as US is expected to attack Syria any moment now in response to the chemical attack against civilians last week. But Russia has warned that in this course if Russian military personnel are harmed in any manner then US should be ready to face “grave consequences"

Now that President Trump has John Bolton as his National Security Adviser, the geopolitical spot has increased even further. On Feb. 28, Bolton published an op-ed in the Wall Street Journal supporting a preemptive nuclear strike against North Korea.

On Wednesday Trump cranked up the threats, tweeting “Get ready Russia, because [missiles] will be coming, nice and new and 'smart'!” which caused the spike in the gold price. Later he appeared to open a window to a more peaceful solution, tweeting that “it could be soon or not so soon at all,” causing gold to lose its earlier momentum.

That gives us an insight into what policy recommendations President Trump might be provided with now.

Even the perceived threat of diplomatic fallout and rumors of a military response can elevate volatility. War games between the U.S. and North Korea would be expected recoil — and that would mean uncertainty over China’s response.

That would give greater rise to volatile conditions in trade, regional security and stability on the Peninsula. By isolating China — North Korea’s top economic partner and military alley — tensions would only escalate.

Needless to say, any armed conflict between two nuclear powers carries great potential risk. One single incident could trigger an escalating spiral.

US Political Risk- November will also bring along a lot of volatility and uncertainty as midterm elections are going to be held.

The U.S would be caught up in more political instability that will harm market stability which further raises concerns that markets are being left uncertain and pondering to guess what happens next?

The world has become a much more dangerous place in the last few weeks. Between competing naval exercises in the South China Sea, a chemical weapons attack in Syria, US and European sanctions on Russia, a likely showdown over the Iran nuclear deal, and a host of other (i.e. India v Pakistan) conflicts not even mentioned here, investors have reason to turn to safe-haven assets – and gold has benefited.

Threats of war are always factored into the safe-haven value of gold on any given day, but we may be witnessing a sea-change where it is difficult to imagine a return to any sense of normalcy anytime soon – especially given Trump's determination to put America's interests first despite ruffling a lot of feathers with both allies and adversaries.

Given these hotspots for the next three months or even further, we expect gold to move on a rollercoaster ride.