Federal Reserve’s hint derails gold

Rajalakshmi Nirmal | Updated on November 24, 2017


Janet Yellen’s remarks that US interest rates could rise soon turned sentiment negative in the yellow metal

After hitting a high of $1393/ounce on Monday, gold retracted and closed at $1335/ounce last week, down 3.5 per cent. Gold lost its sheen as tensions in Crimea eased with Russia not advancing beyond Crimea.

Silver ended 5 per cent lower at $20.3/ounce. Platinum closed at $1434.8/ounce, down 2 per cent.

What went against sentiment of gold bulls were also the remarks of Fed chief Janet Yellen. In its policy meet on March 19, the Federal Reserve cut bond purchases by another $10 billion and Yellen said interest rates could start rising about six months after quantitative easing comes to an end.

Given the current pace of cut in stimulus, interest rates might start to rise by around April or May 2015 as QE ends by this year end. Yields on US short-term bonds rose sharply post Yellen’s comments.

These developments saw safe haven buyers turn to dollar last week. The currency rose sharply, stealing the show from precious metals. The US dollar index hit 80.35 on Thursday, a day after the Fed minutes were released. It ended at 80.105 on Friday, logging a gain of 0.8 per cent.

On the economic front, data releases in the US added to the woes of gold. US industrial production in February increased more than expected, shrugging off debates of a slowdown.

Also, the number of people filing for jobless benefit rose less than anticipated.

SPDR Gold Trust — the world’s largest gold backed exchange traded fund — witnessed selling. The fund reported holdings of 812.7 tonnes of gold on Friday, down from the week’s beginning of 816.5 tonnes.

Domestic market

In the domestic market, gold did relatively better despite a strong currency.

MCX gold futures dropped 2.8 per cent to end the week at ₹29,742/10 gram. MCX Silver futures dropped to ₹44,651, down 5 per cent.

Rupee strengthened against the US dollar on good flow of money into the country.

FIIs have brought in $1755 million so far this year. This is among the highest inflow in EMs.

Last week, the RBI allowed five private banks to import gold within permitted limits, expanding the earlier list of just six banks and three state-run trading agencies. The move is expected to improve the supply of the yellow metal in the country, reducing the premium on the metal.

In February, jewellery exports from India rose for the first time in many months on improved supplies of the yellow metal.

Cues to watch

The Ukraine-Russia matter has been pushed to the backburner now. With minor sanctions on Russia, markets have pooh-poohed any geo-political threat. Also, with Russia not intending to hold a referendum in south-eastern Ukraine for now, the market’s focus has turned back to the US economy.

Next week, on Tuesday, the US new home sales data is expected. On March 27, with the jobless claims report, the third estimate of the fourth quarter GDP will be announced.

Market expects growth to be revised upwards from 2.4 per cent to around 3 per cent. Gold bulls will take a beating if growth is as expected. In the medium term, gold is also likely to face a risk from the weakening yuan.

As the People’s Bank of China tries to further weaken its currency, the country’s gold imports may take a knock. A depreciating domestic currency makes imported gold costlier for citizens.

In the Shanghai market gold prices have moved to a discount to spot prices from a premium in the year beginning.

On Friday, China’s yuan dropped to a 12-month low against the US dollar at 6.2330

On Charts

Profit booking could be one reason why gold reversed from $1392 last week.

But with the sell-off last week, the short-term trend in the chart has turned negative for gold. Tuesday’s sharp price drop followed a bearish engulfing candle formation on Monday.

There is a high probability of a further downside in price in the coming week.

The support is at $1312. If it cuts $1312, the metal could fall much steeply. On the upside, the first target is $1358.

Outlook for MCX gold (₹29,742) futures is also weak. With rupee heading up, more losses are possible. The supports are at ₹29,400 and ₹29000.

On the upside, resistance is at ₹30, 000 and ₹30,500.

MCX Silver (₹44,651) has moved back to its support zone again. It is likely to correct further in the coming week to ₹43,800 and ₹42,500.

If there is an unexpected about-turn the target is ₹46,500 and ₹47,000.

Published on March 23, 2014

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