Gold might increase but with a lag

The yellow metal is down about 8 percent this year amid rising U.S. interest rates, trade disputes and the Turkish currency crisis, with investors parking their money in the dollar, which is being viewed as a safe-haven asset.

Firm U.S. dollar makes gold more expensive for holders of other currencies, with safe-haven demand for gold this year overshadowed by the metal’s relationship with the greenback
Gold's weakness in the international market is primarily on account of the US Federal Reserve's hawkish stance. It has hinted at four rate hikes this year and more next year. The US Fed is also shrinking its balance sheet.

On one hand the US Fed is raising rates and on the other hand central banks are doing completely opposite. This action is strengthening the dollar and hitting on gold.
An increase in rates is expected soon because the Fed believes that the US economy is strong enough to support a hike. This belief has led to an increased pressure on gold.

Following this sentiment, Gold prices edged down on Tuesday as the dollar hit a more-than-one-week high on the back of intensifying global trade tensions and economic worries in emerging markets.
Spot gold was down 0.3 percent at $1,196.90 an ounce during Tuesdays trading hours.

Many currencies world over have suffered setbacks against a strengthening dollar.

The dollar index, which measures the greenback against a basket of currencies, hit its highest since Aug. 24 at 95.410.

Now what will hold great importance for the dollar and the gold is the US economic data. Markets are closely watching the economic number, including a manufacturing survey on Tuesday and an employment report on Friday, which could influence gold’s moves this week as investors look for clues on the pace of U.S. interest rate increases.

Meanwhile, worries over an escalation in trade conflicts between the United States and other countries have kept participants in broader markets on the edge.

The threat of trade wars has only impacted currencies as of now. Analysts are expecting gold prices to start rising with a lag.

Currently we have been witnessing global economic crisis. This is making the other currencies weak and benefiting the dollar and time and again we have seen that any rise in dollar pulls down gold prices.

But if we see the domestic market, the gold dollar relationship is behaving in a very interesting manner.

Dollar and gold have an inverse relation so when the dollar strengthens, gold prices fall.

But when the dollar strengthens the rupee weakens, and a falling rupee offsets the fall in gold prices in India. So, while the price of gold may fall 7% in dollar terms, it may drop only 5% in rupee terms.
Any economic or political crisis results in an upsurge in gold prices and similar behavior as expected over the trade crisis between US and China. But it seems that gold’s rally has been totally offset by a strengthening dollar.

Analysts believe that gold could revive if the ongoing trade dispute between the US and China flares up into a full-fledged trade war. If the US economy suffers, gold would benefit from this.
Given the risks that exist today in the global economy, gold can prove to be a useful portfolio diversification tool and can help reduce overall portfolio risk.

Global inflation, rising interest rates, tightening of monetary policies by central banks, high crude prices are all positives for gold. 

Political Turmoil Expected to influence Gold

Gold turned negative on Tuesday as U.S. Treasuries rose after the United States and Mexico struck a trade deal, with analysts saying ongoing U.S.-China tensions would continue to weigh. Spot gold lost 0.4 percent to $1,206.39 per ounce during Tuesdays trading hours.

Following suit, Gold price fell on Thursday and is set to record a fifth monthly fall on expectations of a higher interest rate, while the dollar also edged lower.  Powell’s speech came after U.S. President Donald Trump said earlier this month that he was “not thrilled” about the Fed’s decision to hike rates. A potential hike in interest rates in general decreases demand for gold, which yields no interests.

Meanwhile, the U.S. reported on Wednesday the strongest growth of its second-quarter GDP in a decade, expanding at an annual rate of 4.2%.

Markets widely expect the Federal Reserve to hike interest rates in September and December following last week’s Jackson Hole symposium, where Fed’s chairman Jerome Powell defended policy of interest rate hikes, adding that he expected a low but gradual growth of interest rates as inflation is reaching the country’s 2% target.

On the other hand, metals investors are wondering if political turmoil could bring in volatility several for gold and silver prices.

Furthermore, what gained focus over the week were the recent prosecutions of prominent Trump campaign figures that now have Democrats giddy over the possibility of being handed grounds for impeachment. The chances for impeachment did get a boost, although it would seem to hinge primarily on whether the Republicans lose the House and Senate in November. It’s a very daunting political task. Only two presidents have ever been impeached – Andrew Johnson and Bill Clinton. Neither were convicted in the Senate and removed from office, however. That can only be done with a ⅔ majority vote.

If the threat of impeachment somehow becomes more credible based on the revelation of more serious crimes, then all bets are off. It will move markets. But, for now at least, it remains a long shot.

Major political turmoil is just one of many reasons to buy insurance in the form of gold and silver bullion. Investors can add upheaval in Washington to a longer list, which, at the moment, also includes:

• Precious metals looking oversold.
• Extremely bullish relative positioning of banks versus speculators in the Commitment of Traders data.