Gold restores faith

The uptrend has once again moved into gold’s life. Gold leaped towards $1365 and the highs of almost a year ago. From the last two quarters of 2018 till date, gold has been climbing up the staircase, leaping higher, then consolidating and then moving up once more.

The middle two quarters of 2018 were bad for gold because the dollar was extraordinarily strong, so was the domestic equity market in the U.S. The influence of all that tended to wane in December, so gold picked up very, very nicely

A weaker U.S. dollar pushed gold up to 10-month highs on Tuesday, with April gold futures last trading at $1,339.70 an ounce, up 1.32% on the day.

With both the dollar and yen sliding, most notably after the BOJ's Kuroda told parliament the Japanese central bank can and will ease far more if necessary, it is perhaps not surprising that gold has surged higher, rising above $1,341/ounce, up over $140 from the early November levels when it was trading in the low-$1,200s, and the highest price since April 2018.

The recent rise in gold prices reflects solid demand from investors and, given that there is a relatively thin supply pipeline of metal between miner, refiner and trader, this is leading to a shortage of physical gold. Gold demand rose in 2018 and, although the US dollar gold price was down 1% over the year, it outperformed many other financial assets. Worries about a slowdown in global growth, heightened geopolitical tensions, and financial market volatility saw central bank demand hit its highest level since.

It is a matter of some speculation, but this story echoes reports that physical gold demand by Central Banks are at the highest since 1967, while institutional gold ETF off take hit an unprecedented 145 tonnes in December and January

Central banks added 651.5t to official gold reserves in 2018, up 74% on 2017 and the second highest yearly total on record. Net purchases jumped to their highest level since the end of US dollar convertibility into gold in 1971, as a greater pool of central banks turned to gold as a diversifier.

Most people are expecting gold to do well this year as gold has restored everyone’s faith in the market.

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.

Is 2019 the year for Gold

2018 has a highly volatile and fluctuating year for gold as it faces many headwinds. A strong dollar, rate hikes by the US Federal Reserve (the Fed) coupled with accommodative policy from other central banks and a US economy buoyed by tax cuts, fuelled positive investor sentiment and pushed US stock prices higher through the start of October.

However, as geopolitical and macroeconomic risks increased, emerging market stocks pulled back and developed market stocks eventually followed.

As 2019 begun, have seen a sharp deterioration in risk sentiment following soft macroeconomic data in December and renewed concerns about the future direction of growth, particularly the risk of U.S. growth catching down towards weaker economies. December was a volatile month which generated a safe haven appeal for the yellow metal.

Lately gold has outperformed other assets in its class. Risk assets took a big hit in 2018, with the stock market suffering the worst in December but gold fared much better as it grew around 4 percent.

If we see the demand graph for gold for the next 6 to 8 months, we expect it to rise as it will benefit from the interplay of market risk and economic growth, with key dynamics, such as financial market instability, monetary policy, the dollar and structural economic reforms.

Rising geopolitical tensions- A fragile political alliance in Spain along with fending off secessionism, an instable monetary union in Italy, and internal turmoil in Europe and lastly social unrest in France- all of these clubbed together gave a very instable global picture. This growing uncertainty and the expansion of protectionist economic policies are making gold an increasingly attractive hedge tool.

Slow economic growth- Weak economic numbers coming from the US has spooked the markets. The U.S. manufacturing PMI (Purchasing Managers Index) hit a 15-month low in the same month. Manufacturers' confidence in business also slipped to the lowest level in nearly two years. This in turn affects the rate hike frequency thus influencing gold prices.

Federal Reserve’s monetary policy- The Fed had been tightening monetary policy aggressively. But on Jan. 4 Fed Chairman Jerome Powell signalled Wall Street that policymakers will be patient with policy moves and are attuned to the messages coming from markets. While gold may face headwinds from higher interest rates and dollar strength but currently the effect of the same seems to be limited on gold as the Feds stance is neutral. Any delay in rate hike will push gold prices higher.

Demand for gold as a hedge tool- Globally, there were net positive flows into gold-backed exchange-traded funds in 2018. However, North American funds suffered significant outflows in the second and third quarters, with this trend only reversing in the fourth quarter as risks began to intensify. But in 2019, global investors are expected to favour gold as an effective diversifier and hedge against systemic risk on multiple global metrics

Central Bank Buying- In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Higher demand once again means higher prices for gold.

Time and again it is proved that gold has delivered returns and has performed better than other assets in its class. Moreover, its liquidity and risk adjusted returns makes it an investors favourite and hence its looks more relevant this year.

Gold benefits from equity slide

Reserves Reserves Reserves - it was all about piling up gold in the past week. And when I Say piling I mean in huge numbers.

Peoples Bank China shocked the world when it’s released the figures of gold reserves that it sits on.  China's gold reserves had been steady at 59.240 million fine troy ounces from October 2016 to November 2018, according to data from the People’s Bank of China, and suddenly jumped to 59.560 million fine troy ounces at end-December.

The People’s Bank of China increased holdings to 59.56 million ounces by the end of December, or about 1,853 metric tons, from 59.24 million ounces previously, according to data on the central bank’s website. They had been unchanged since about 130,000 ounces were added in October 2016.
China has long been wanting to reduce its dependency on the US dollar. The ongoing trade war is threatening its economic growth.

Several large emerging economies, which today fuel most of global growth prospects, and major oil exporters, are intrigued by the idea of re-coupling gold with a multilateral currency basket to avoid excessive exposure to US dollar-denominated energy and commodity markets.

 Spot gold had its strongest month in almost two years as those fears spurred a whirlpool in equities and the dollar and boosted demand for the precious metal as a haven. And hence the world’s biggest producer and consumer boosted holdings of bullion.

But it was not an overnight thing. China has been piling reserves since quite some time. It had last released the figures in 2016 and now suddenly. And it’s not just China that has been doing this.  As Bloomberg reports, Poland and Hungary surprised the market in 2018 by adding to their gold holdings for the first time in many years.

Furthermore, there have been interesting shifts in gold reserves. While advanced economies, such as the US and Germany, still own most global gold reserves, the US has increased its gold holdings in the past decade only marginally, while Germany has been forced to cut its reserves. In contrast, China has tripled its reserves, while Russia has nearly quintupled its gold (after dumping billions of US Treasuries), despite rounds of sanctions.

Fresh comments coming in from Federal Reserve Chairman Jerome Powell on Friday, got in a fresh rally in gold prices. The statements released boosted the chances that the central bank will pause interest-rate increases. Speculation that the Federal Reserve may pause its interest rate hikes has given further strength to gold’s rally into the new year and assets in bullion-backed exchange-traded funds are at a seven-month high. Spot gold was trading 0.5 percent higher at $1,291.83 an ounce as the week ended. Strengthening of the yellow metal has further weakened the greenback.

Gold was out of favour for much of 2018 as a result of the strong dollar and interest rate increases in the US. The precious metal traded as low as $1,174 an ounce in August, despite rising geopolitical tensions.

However, sentiment began to improve towards the end of the year, as volatility increased further and US stocks suffered.

THOSE analysts who believe that fear has made a comeback argue that gold is benefiting as equities slide and investors are increasingly concerned about the economic prospects of the United States (US), China, Europe and Japan. Yet, even at $1,290, gold still remains more than 30 percent behind its all-time high of $1,898 in September 2011 amid the US debt-limit crisis.

Where is Gold Heading To

AN upbeat U.S data and a strong dollar played key roles to pull down gold prices during the week. A lot was expected to happen over the number of data releases-

US employment report, ahead of that there is
• Data on Spanish unemployment,
• UK construction PMI
• EU PPI
• Italian CPI
• US data on factory orders
• University of Michigan consumer sentiment
• Inflation expectation.

Of these, markets remained focussed on U.S nonfarm payrolls data and gold seemed to be behaving reacting to this influential factor

An expectation of strong economic number coming in from US strengthened the dollar. Spot gold was down 0.3 percent at $1,345.22 an ounce as the dollar ticked up against the euro ahead of hotly anticipated U.S. non-farm payrolls data, which would further give fresh clues on the outlook for U.S. interest rates.

Stronger than expected numbers could shore up expectations for the Federal Reserve to press ahead with interest rates hikes this year thus increasing the opportunity cost of holding non-yielding bullion

The dollar rose 0.2 percent against the single currency in early trade, though it remained on track for a seventh straight weekly loss. Its early signs of strength pressured gold, which is priced in the U.S. unit. Once data was out, gold didn’t show that great reverse effect as expected.

 Gold ended the week little changed, after rising in six out of the last seven weeks and hitting its highest in 17 months last week at $1,366.07.

 Data released was as follows -   

• Nonfarm payrolls and unemployment rate- non-farm payrolls grew by 200,000 in January and the unemployment rate was 4.1 percent, while wages saw their biggest jump since the end of the Great Recession, the Bureau of Labour Statistics said in a closely watched report Friday.

• Hourly Earnings- More importantly, average hourly earnings increased 2.9 percent on an annualized basis, the best gain since the early days of the recovery in 2009. In addition to the solid payroll growth, average hourly earnings were up 0.3 percent for the month, matching estimates and reflecting an annualized gain of 2.9 percent. That was the best since mid-2009 as the two-year economic slump was coming to a close. However, the average work week fell two-tenths to 34.3 hours.

Within the jobs report, Wall Street and policymakers are watching wage numbers closely. While job gains have been solid and consistent, salary growth has been elusive. This report could change the narrative and might push the Fed to get more aggressive with interest rate hikes.

The Fed held interest rates unchanged after its latest policy meeting this week but raised its inflation outlook and flagged "further gradual" rate increases.           
 
During the December meeting, the Federal Reserve said that it expects that economic conditions “warrant gradual increases,” in the federal funds rate, and added that inflation declined in 2017 and was running below 2%.

Should the Federal Reserve reaffirm expectations for three rates hikes, bond yields could surge.
Some market participants warned, however, that the yellow metal may face a period of weakness as physical gold demand is expected to decline as seasonality is starting to fade ahead of the Chinese New Year.

With many other asset classes already at record price levels, there is a risk of corrections either while geopolitical developments unfold or as inflation and interest rates rise to the extent that investors take profits. Investors may well see gold as offering a relatively cheap safe haven while corrections unfold in other markets

Now gold has already broken above its 2017 high of $1357, as we had expected, before retreating over the past few days. It has now taken out some short-term support levels in the process, but the key support levels such as $1335 and $1325 are still intact, so the long-term technical bullish outlook remains in place for the time being. If we are going to see new highs for the year in the coming days, then gold will have to break back above those short-term broken levels, which are now acting as resistance. Among these, $1344/45 is an interesting level to watch today. If there’s acceptance above it then don’t be surprised to see gold go back above $1357 – the 2017 high – soon. And if gold were to get back to these levels then it would increase the probability of it reaching for liquidity that is resting above the 2016 high of $1375 next. On the flip side, if $1335 gives way first, then one will have to consider the bearish argument, more so if it also goes below $1325.

2017 - SURPRISES TO UNFOLD FOR GOLD : RSBL

Until Wednesday last week, gold was trading in positive territory continuing the rally from the previous session.

The spot gold price was quoted at $1,164.85/1,165.15 per oz, up $8.05 on the previous close.

There were many supporting factors for gold’s rally-

• Mainly all the uncertainty that lies ahead with the changeover in the US administration 
• Brexit 
• The weakening trend in the yuan. 

On Friday last week, gold slipped following the release of strong US employment data which was as follows-

• The USA added 156,000 jobs in December, compared with 204,000 in November, while wages grew 2.9% year-on-year to reach a seven-year high.
• German industrial production climbed 0.4%, which was down from the 0.7% expected, while the country’s trade balance climbed more than expected. 
• The non-farm employment change for December showed 156,000 Americans entered the workforce, a slight miss from the 175,000 forecast.
• However, the figure for the previous month was revised up 19,000 jobs and the headline unemployment figure came in as expected at 4.7%.
• The big surprise was that average hourly earnings grew by 0.4% month-on-month, bringing total wage growth to 2.9% for the year and the highest level since before the recession.

Gold prices were in positive territory in London on the morning of Monday January 9, recovering slightly from last week’s drop.

The spot gold price was recently quoted at $1,176.20/1,176.50 per oz, up $3.40 on the previous close. Trade has ranged from $1,172.50 to $1,178.75. Gold prices edged up in a technical rebound on Monday after one-month highs hit last week were undercut by the prospects of more interest rate hikes from the US Federal Reserve.

US employment increased less than expected in December but a rebound in wages pointed to sustained labour market momentum that sets up the economy for stronger growth and the prospect of further interest rate increases this year.

Chicago Federal Reserve President Charles Evans said on Friday the central bank could raise interest rates three times this year, faster than he had expected just a few months ago.

Evans and other regional Fed presidents are scheduled to speak this week, and the outlook for U.S. rates may become even clearer when Chair Janet Yellen appears at a webcast town hall meeting with educators on Thursday.

Expectations of US interest rate hikes lowers demand for the non-interest-paying bullion.
Apart from a rate hike the most discussed r rather the most awaited topic currently is the fiscal stimulus that Trump is promising and, of course, inflation.

Despite the rebound in the dollar, gold prices are holding up well – all thanks to the safe haven move by investors, just ahead of the shift in US administration.

By the end of 2016 or rather post the 2016 US election, confidence in the global markets was running high thus propelling gold to lose its safe haven appeal. But 2017 has lot of uncertainties and surprises to unfold for gold which will once again get into the investors basket keeping in the mind its appeal as a safe haven asset in times of global uncertainties.

In the week ahead, investors will be looking ahead to US economic reports, particularly Friday’s retail sales figures for December. Investors will also be watching an appearance by Fed Chair Janet Yellen on Thursday and speeches by a handful of other Fed officials during the week, as well as President-elect Donald Trump on Wednesday for a press conference.

Now investors await the upcoming inauguration of President-elect Donald Trump to see what the volatile leader will implement once in office.