Commodity Analysis

All eyes on the Fed

Rajalakshmi Nirmal | Updated on January 22, 2018 Published on September 13, 2015

Janet Yellen

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Gold prices could take cues from the Fed rate hike this week



US interest rates have been near-zero from late-2008, and now markets are expecting that the Federal Reserve will effect its first rate hike in the upcoming meeting on September 17.

Long-term investors should note that historically, though gold prices have dropped in the run-up to a Fed rate hike, they have strengthened after the first or second rate hike — behaviour that shows that traders usually buy on rumours and sell on news.

This week, all eyes in the bullion markets will be on the upcoming FOMC meeting on Wednesday.

The cues as of now are mixed. With the US labour market continuing to strengthen and the unemployment rate at a seven-and-half year low, some believe the US economy is healthy and ready for monetary tightening.

But, there are two arguments for the central bank to defer its rate hikes too. One, after the Chinese market crash, there has been chaos in financial markets across the globe.

The Reuters CRB Commodity index has recently dropped to levels last seen in 2003 with the prices of oil and base metals plummeting. Equity indices are down about 7-15 per cent year-to-date and many central banks are resorting to monetary easing.

Over a dozen of them, including China, Thailand, South Korea, Australia, Russia, Poland and India, have cut rates so far this year.

Further, with the greenback gaining muscle on hopes of a lift-off in rates since the beginning of the year, there has been high volatility in the currency market.

The Brazilian Real, Malaysian Ringgit, Turkish Lira and Indonesian Rupiah are down by 15-30 per cent against the US dollar year-to-date. The greenback, as measured by the US dollar index, is up 13 per cent so far. Any rate action by the US now can add to the turmoil. It may want to avoid such a scenario.

Two, inflation — a key factor in rate actions — in the US is still low. In July, it was reported at 0.2 per cent — well below the Fed’s 2 per cent target rate.

With deflationary risks higher now with a slowing China and downside risks to oil prices, a rate hike now may invite more problems for the Fed. In the recent survey by University of Michigan, the consumer sentiment reading fell to 85.7 down from 91.9 in August.

With strong cases both for and against a Fed rate hike, both gold and the dollar declined last week, revealing the market’s confusion. Gold prices dropped by 1.2 per cent last week and closed at $1,107.9/ounce.

The US dollar index lost 1.08 per cent to close at 95.194. Silver remained flat at $14.6/ounce and platinum lost 2 per cent to end at $969.8/ounce.

Investors weren’t seeking safety. The SPDR Gold Trust, the largest gold backed exchange traded fund, saw holdings shrink to 682.35 tonnes from 678.18 tonnes a week back.

Back in India, there was some cheer among jewellers with the Cabinet giving a nod to the gold monetisation scheme, which is expected to improve domestic market supplies of gold. Gold bonds also received approval. The RBI will operate this scheme on behalf of the Government of India and allow purchases of a maximum 500 grams via bonds, in a year.

Cues to watch

This week is going to be packed with key data releases in the US. Before the FOMC press meet that is scheduled on Thursday, there is retail sales and industrial production data on Monday, Consumer Price Index on Wednesday and housing starts data on Thursday morning.

In the initial part of the week, gold may weaken further and hit levels of $1,096 or even lower, so be cautious. Later, if it pans out that the data and Fed decision turn negative for gold, prices may drop further targeting $1,067 levels. For the trend to turn positive, prices have to break past $1,150.

Eye on charts

Indian gold investors are facing a tough time because of increased market volatility. The MCX gold futures contract dropped over 2 per cent last week to ₹25,967, despite the rupee being weak against the dollar.

MCX Silver was flat at ₹34,975. The rupee ended at 66.54, marginally lower from 66.46 last week, despite a selling in the equity market with FPIs pulling out. This week, the MCX gold contract may see support at ₹25,500 and ₹25,000. If it moves up helped by a weak rupee, the first resistance will be at ₹26,400 and the next at ₹26,900.

MCX Silver may see a range-bound movement. It may see the first resistance at ₹35,400 for the target of ₹36,150. On the downside it may test ₹34,000.

Published on September 13, 2015
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