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.

The time for Gold should come soon

Gold prices gained on Friday and were at weekly record gains, while the dollar also traded higher although it is still hovering near two-month lows.

The dollar fell to a nine-week low against a basket of major currencies on Thursday as investors shifted their focus from a trade row between China and the United States to the Federal Reserve’s monetary tightening plans.

Currency markets have become more settled since reacting strongly to new tariffs announced by Washington and Beijing on Tuesday.

The fall in dollar this week came as safe-haven demand for the U.S. currency ebbed amid continued relief that fresh U.S. and Chinese tariffs on reciprocal imports were less harsh than originally feared.

On Monday, the U.S. slapped tariffs of 10% on $200 billion in Chinese goods, before they rise to 25% by the end of 2018, rather than an outright 25%.
China retaliated by putting tariffs on $60 billion in U.S. goods. However, China will put a 10% tariff on some goods it had previously earmarked for a 20% levy.

Reports of the tariffs imposed by the U.S. and China on each other's goods being set at lower levels than expected were cited as headwind for the dollar prices, which is widely seen as safe-haven assets.
The dollar was also under pressure after a report said that the U.S. and Canada are unlikely to reach an agreement on NAFTA this week.

While trade disputes gained momentum, there was one more thing that has kept the markets on its toes. The next Fed meeting. Investors looked ahead to the next Federal Reserve policy decision to be announced on Sept. 26.

U.S. economic data has remained strong, and the dollar has tended to act as a safe-haven trade, gaining as tensions between Washington and Beijing escalate.

Markets currently expect the Fed to hike rates by a quarter of a point, while fed fund futures price in an additional increase at the end of the year at more than an 80% probability.

Looking ahead, markets would be paying close attention to next week’s Federal Reserve meeting. The U.S. central bank is widely expected to hike rates and discuss paths for future rate hikes. Higher rates dent demand for non-interest yielding gold and in turn boost the dollar in which it is priced.

The Federal Reserve is next week expected to raise benchmark borrowing costs and shed more light on its future rate path.

One more noteworthy thing that happened over the week was gold buying by Russian central bank.  As mentioned in my blogs earlier, the Russian central bank has been piling up its reserves and the latest figures released , stated that it has added a further 1 million ounces of gold (31.1 tonnes) to its reserves that month bringing the grand total to just over 2,000 tonnes as we suggested a month ago. It now has the holdings of Italy (2,451.8 tonnes) and France (2,436.0 tonnes in its sights to become the third largest national gold holder after the USA (8,133.5 tonnes) and Germany (3,369.9 tonnes) – all figures as reported to the IMF.

Russia and China are both believed to by buying gold as they feel the yellow metal will have an important role to play in the ongoing development of the global financial system. Russia and perhaps China too, are also believed to be buying gold, amongst other moves, to reduce their dollar-related forex holdings.

All these considerations suggest one thing- . Gold should shine not only due to the lower real interest rates and as an inflation-hedge, but also as a safe-haven asset hedging against the potential overshooting by the Fed.  We don’t expect any major financial crisis or that there won’t be a rate hike—what we think keeping these considerations in mind- the time for gold should come soon.