Commodity Analysis

Fed stance shifts gold target

Rajalakshmi Nirmal | Updated on January 20, 2018 Published on March 20, 2016



The Fed skipping hikes recently has weighed on the dollar even as gold regained its gleam

So far this year, gold has been the frontrunner in the rally by precious metals. It has also performed in line with our beginning-of-the-year forecasts. The first upside target for gold for the year at $1,155/ounce and the second at $1,200 have been hit, though more quickly than expected. Gold has (year-to-date) delivered 19 per cent returns while silver is up 16 per cent. Oil prices, which were at $37/barrel when we wrote the 2016 outlook for gold, slipped to $26/barrel by February and are now at $40/barrel, up 8 per cent. The US dollar index has dropped 4 per cent to 94.8. So where is the metal headed?

Shifting cues

A key factor that underpinned the outlook for gold at the start of the year was the view that the Federal Reserve will hike rates in March. But in its meeting last week, it decided to keep rates unchanged. Policy makers forecast the rate at 0.875 per cent at the end of 2016, implying two rate increases this year, down from the four forecast last December.

The central bank also revised its GDP forecast to 2.2 per cent from 2.4 per cent in December and inflation expectations for the year to 1.2 per cent from 1.6 per cent. The Fed believes that with negative rates in the EU and Japan and the global economy on a weak footing with China concerns remaining, a rate hike in the US could see more investors take flight to dollar assets. With the dollar dipping, the other safe haven — gold — has gained its mojo. Gold’s rally has also been underpinned by its improving fundamentals. Demand for the yellow metal from emerging market countries, whose currencies have been bruised badly by the strong dollar, has risen. Supply of gold, in the meantime, has fallen. Numbers from World Gold Council recently showed that total gold supply declined 4 per cent in 2015 (to 4,258 tonnes) over the previous year.

The market has been pricing in all the above factors, giving it a leg-up since January. The SPDR Gold Trust, the largest gold-backed ETF, has seen its holdings rise by a fourth (153 tonnes) so far this year. Thus, the yellow metal ended the week up 0.3 per cent.

Silver vs gold

Silver has also rallied since the beginning of the year, but its returns have been lower than gold. Traditionally, silver tends to move more sharply than gold in either direction. But this time the trend has changed and silver’s gains have trailed those of gold. This could be explained by the increase in global economic concerns hitting silver’s industrial demand. The gold/silver ratio is at about 80 times now, the highest since 2008, showing that silver is relatively undervalued. So, silver could play some catch-up now.


International: Gold prices have risen sharply in a short span. Though the probability of their heading up further is open, there may be a consolidation around $1,200-$1,280 levels for some time. It is also possible that the metal remains range-bound for the rest of the year and does not register significant gains from here. On the higher side, technically, the target is $1,380 — the 38.2 per cent retracement level from the 2011 high of $1,921. The first targets will be at $1,290 and $1,301. On the downside, there is a strong support around $1,200 levels and declines below it are unlikely.

MCX gold: MCX gold has also made an impressive rally. Given that rupee has remained around 66 levels against the dollar, the contract has mirrored returns in gold in the international market. Year-to-date, the contract has gained 18 per cent. Last week, it closed at ₹29,131, down 1 per cent. On the charts, an upside from here could take it to ₹31,100. Immediately, though, the contract may try for ₹29,600. If the strong resistance at around ₹30,000 is crossed, it will hit ₹31,100 levels easily. But a drop from current levels will see the contract heading to ₹28,500.

Published on March 20, 2016
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