GOLD FAILS TO ATTRACT SAFE HAVEN BUYING: RSBL

 By Mr. Prithviraj Kothari, MD, RSBL

The week began with a lot of geo political uncertainty and these rising tensions were expected to ignite gold prices.

But geopolitical tensions  took more of a backseat, with the minutes from the FOMC’s latest policy meeting set to be scrutinized later in the week for clues on the timing of a rate rises in the US.

The gold price had risen to a one-week high on Monday following Friday’s terrorist attacks in Paris, which fuelled safe-haven demand.

On Friday, 13 November, a coordinated terrorist plot in Paris led to over 100 deaths and hundreds injured. The Islamic State boasted and claimed responsibility for the deadly attack, which follows recent attacks by the organization in Lebanon and a suspected bombing of a Russian airliner.

French President Francis Hollande responded by launching a massive airstrike on the ISIS stronghold of Raqqa in Syria.

In tumultuous periods, gold harvests safe-haven appeal as investors seek physical assets like gold versus other investments like bonds or equities. 

However, Gold failed to attract safe-haven buying as a strong dollar offset geopolitical concerns. The dollar placed a cap on the market as it traded at a 7-month high.

Gold received only a small safe-haven lift from the terrorist attacks over the weekend in Paris and Beirut. It rose to $1,097 on Monday but those gains faded away as a strengthening dollar ended the rally. The dollar remained well-supported by broad expectations that the first US interest rate hike in nearly a decade could likely be initiated by the US Federal Reserve in December.

Gold prices dropped to a 5.5-year low on Tuesday, pressured in part by rallying U.S. and world stock markets early this week. 

U.S. economic data released Tuesday was a mixed bag thus leaving the markets confused.

• A heavy data day, US consumer price index month-over-month for October rose  0.2percent, in-line with expectations.
• The core CPI also increased 0.2 percent.
• The capacity utilization rate at 77.5 percent was as forecast.
• US industrial production over the same period dipped 0.2 percent, below the forecast 0.1 percent.
• The NAHB housing market index for November was 62, just missing the estimate of 64.
• The spot gold price was last at $1,081/1,081.30 per ounce, down $2.40 on Monday’s close.

While in the US, market players still expect the Federal Reserve to raise rates for the first time in nearly a decade at the mid-December Federal Open Market Committee (FOMC); Fed chairwoman Janet Yellen has argued for an increase in the Federal Funds rate before the end of the year, citing worries of prolonged periods of cheap capital and its long-term effects on the economy.

On Wednesday, investors’ focus shifted to the minutes from the FOMC’s October policy meeting.

Spot gold was last at $1,075.1/1,075.4 per ounce, up $3.50 on the Wednesday closing level.

Seventy percent of market participants believed the Fed will raise rates next month, according to the CME Group Fed Watch.

The minutes released showed that most members of the Federal Open Market Committee at the October meeting said the conditions for a rate rise could be met by December. A minority, however, said the data may not support a hike and suggested the Fed may need to add monetary stimulus if the economy unexpectedly slows.

The release of the minutes from the October FOMC meeting suggested that  it “could well be” time to raise short-term interest rates at the December policy meeting and as a result the committee chose to alter the wording of their policy statement to ensure their options were open for a move next month.

Gold prices climbed on Thursday morning in London as the dollar fell back even though a majority of US Federal Reserve members believe a December rate hike is becoming more appropriate.

Gold prices climbed on Friday morning in London, boosted by short-covering and fresh buying despite the October FOMC minutes suggesting the Fed will lift interest rates from December. But later in the day gold prices declined.

With the US essentially closed for half the week for Thanksgiving, it’s a quieter week for news and gold may continue to consolidate. All the potentially market impacting fundamental news is packed into Tuesday and Wednesday morning. The key report is U.S. GDP which could potentially impact gold through the U.S. dollar as it could impact speculation on a FOMC rate hike next month.