Market Should Wait for More Stability

Last week, the price of gold spiked above $1,400 per ounce, a level that, signals the beginning of a new bull market for gold. Many factors have been driving gold’s price higher, including recent changes in the U.S. Federal Reserve’s outlook that increased the chances of future rate cuts, the European Central Bank’s comments from earlier this month signaling that further rate cuts may also be a possibility in Europe, falling U.S. Treasury rates and a declining U.S. dollar.

The surge in the price of gold following the Federal Reserve meeting indicated a material change in market behavior as the adjustments to the Summary of Economic Projections (SEP) fuel betted for lower US interest rates.

Some disappointing numbers coming in from the US strengthened gold prices further. The US economy showed fresh worrisome signs on Monday as home sales and consumer confidence sank. Sales fell 7.8% to a five month low in a sign that low rates aren't spurring activity. Consumer confidence also dove to 121.5 from 131.0 as the expectations survey cratered. Those numbers added to the pessimism in the US dollar early and lifted gold for the sixth day.

On a day filled with economic data and Fed speakers, it was St Louis Fed President James Bullard who stole the market's attention with a hint that a rate-cutting cycle isn't coming. Instead of a series of rate cuts, Bullard implied there would be one or two.

Like a typical Bollywood masala movie, there were a lot of twists and turns that continued on Fed chief and other Fed members as FED GUV had appeared just before the Powell’s Speech on 25^th June, and he said that an emergency is not beyond the realm for the Fed.

Later Powell came out and stated that Fed and the independent Body don’t come under political pressure and that one weak data doesn’t necessarily mean a weak economy.
However, comments from St. Louis Fed President James Bullard, a 2019 voting member on the FOMC, suggested the central bank will insulate the US economy with an “insurance cut” as the official insists that a reduction of “50 basis points would be overdone.”

Moreover, Chairman Jerome Powell pointed out that the baseline outlook for the US economy “remains favorable and it seems as though the FOMC will take a more reactionary approach in managing monetary policy as the central bank head pledges to “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
With that said, details of a US-China trade deal may ultimately lead to a minor adjustment in monetary policy, but Chairman Powell and Co. may have little choice but to re-establish a rate cutting cycle as the Trump administration continues to rely on tariffs and sanctions to push its agenda.

These price movements had a spill effect in the domestic markets too. Local gold prices hit a record ₹35,960 per 10 grams on Tuesday, having jumped more than 10% over the past month. People generally don’t tend to buy gold in such a high volatile markets. Such high jump in prices is welcomed with a dampening demand as investors and consumers would prefer to buy gold in a more stabilized market.

So all in all, the DOW turned weak. The US 10y yields did not gain and still hover 2.00%. This is one indicator that rate cut will be there and dovish view has to be maintained by FED and that’s the reason that gold cannot be bought at $1405-$1425. Our Managing Director Prithviraj Chauhan known as The Bullion King of India has advised markets to wait for more stability and clarity on the global economic front.

BUDGET 2019

International markets didn’t witness much volatility as US market remained closed on 4th July over Independence Day.

Now there are 2 points to be noted-
Firstly, the US DOW is at life’s high at 27000 as the plunging yields are now at 1.94% US 10y. This indicates that the rate cut is bound to happen soon.

Secondly, the key number comes in from US payroll at 6.00pm IST. The Fed meet and broader expectation of 162k vs. last times 75k. Moreover, unemployment rate is expected to be at a decade’s high.

Till then market is expected to be trading in a narrow range.
As far as domestic markets are concerned, all eyes were on the much awaited budget, well named as Modi 2.0 budget.

A clean win this election for our respected PM Modi clearly indicates that the public has hopes with this government and expects it to work for the betterment of our country. Similar to these lines, the common man also had many expectations from this budget with respect to taxation, water managements, farmer loans and many other critical issues.

Even the gem, jewellery and gold industry had expectations that this budget would bring some relief to the sector where duty structure is concerned.

What was need was that the government should give a thought on how gold should be treated and how it should be classified into asset class. Once gold is classified into an asset class then other products like Mutual Funds, Insurance Fund, Pension funds should be allowed to invest into the yellow metal. The dollar rupee fluctuation can be hedged and interest rate can be covered on large scale.

Another need of the hour was to have a more organised gold market. Introduction of a trading platform/exchange to trade gold and all transactions should take place only on this platform. This would bring about transparency in its pricing, set benchmark prices and would benefit the end consumer on a large scale.

Gold has an import duty of 10 per cent, and market players wanted it to be pulled down to 4 percent to boost demand. But the government has proposed to increase the duty to 12.5 percent to mobilise resources. We need to wait and see how markets have accepted this rise in duty and what will be their reaction.