Gold eyes Fed’s next move

Rajalakshmi Nirmal | Updated on January 19, 2018



Uncertainty over Fed’s further rate hikes, adds glitter to gold

Until 2014, gold and oil moved in tandem, exhibiting a high positive correlation. So when oil prices slid, gold too followed suit and trended lower. But since 2015 when oil prices started to plummet sharply, the link between the two has weakened.

Today, while both oil and gold have an inverse relationship with the dollar, they are not moving in tandem. This year, even as crude prices have fallen about 20 per cent so far, gold is up two per cent. The correlation between gold and oil is a negative 0.4. The correlation had, in fact, turned weak in 2015 itself — to a positive but to a low of 0.10.

What’s changed?

Gold has been in a bear market since 2013, and is consolidating at current levels of $1,000/ounce.

Recent news of geo-political tensions across the world is offering support to prices. Oil, however, continues to face problems.

With ban on Iran being lifted, it is feared that the supply glut in the global oil market will worsen this year. In 2015, the non-US supply reductions were only marginal. OPEC’s output, according to reports, was at more than 30 million barrels per day.

Interestingly though for gold, if this rout in oil continues, it will reduce the headroom for further rate hikes by the US Fed.

In December, when the Fed finally hiked rates, the general view was that oil’s impact on inflation is temporary and it will soon wane. But now, given the pace of the fall in oil prices, the central bank may have to think through rate hikes more carefully. Last week, a data from the US Labour Department showed that import prices fell 1.2 per cent in December over the previous month (and down 8.2 per cent over last year). Soon, the impact of dropping import prices will reflect in the prices of consumer products.

When the Fed hiked rates last month, the broader expectations were that it may do another four 25 basis points hike in 2016. But, with oil prices tumbling, this looks doubtful.

A delay in the Fed’s next rate hike will be seen positively by gold investors as it increases the attractiveness of the yellow metal vis-à-vis dollar and US treasuries.

Cues to watch

Last week, gold prices ended at $1,088/ounce, down about one per cent. Silver ended marginally down at $13.92/ounce.

The dollar index strengthened and crossed 99 levels and ended the week at 98.95.

This week, there are several key data releases in the US. It begins with CPI and housing starts on Wednesday, followed by jobless claims on Thursday and existing home sales data on Friday.

CPI is expected to be unchanged for December, month-on-month. A negative reading will see the market prepare for a slower pace in rate hikes from the Fed during the year. The central bank’s next meeting is on January 26,27.

The weak US and Asian equities market will offer support to gold prices in the short-term.

Technically, gold looks set to hit $1,100/ounce. But, that is possible, only if it crosses its resistance around $1,092 and then at $1,097/ounce.

Rupee helps

If it drops and moves below $1,070/ounce, it may decline further.

MCX Gold contract closed positively. It ended the week at ₹26,112 up 0.5 per cent. MCX Silver closed at ₹34,054, also marginally up. Weakening of the rupee helped both the contracts.

The rupee dropped from 66.6 levels to 67.6 against the dollar.

With gold denominated in dollars, a fall in value of rupee against the dollar, increases returns on the metal for domestic investors.

Spot market gold prices also moved from a discount to a premium last week, thanks to a pick up in demand due to the start of the wedding season.

This week, the contract will try to move towards ₹26,500 levels, if the resistance at ₹26,200 is crossed. On the downside, supports are at ₹25,800 and ₹25,000.

MCX Silver will see a range-bound movement between ₹34,000 and ₹35,000.

Gold bond scheme

The second tranche of the sovereign gold bond scheme is coming up. It will be issued on February 8.

Applications can be made between January 18 and 22 to designated banks.

The interest rate is the same as the earlier — 2.75 per cent per annum payable semi-annually on the initial value of investment.

Issue price will be gold’s previous week’s average price.

Published on January 16, 2016

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