Gold market bets on a slow Fed

Rajalakshmi Nirmal | Updated on March 09, 2018


After fretting about it for a while, the market seems to be pricing in modest hikes

Gold prices hit a low of $1046.4/ounce on Thursday, but ended the week at $1,086/ounce with a gain of 2.7 per cent, thanks to the US jobs report. Data on Friday showed that the US non-farm payrolls increased by 211,000 in November.

October’s increase was also revised upwards to 298,000 from 271,000. This set the mood for a rate hike.

But given the reaction in gold and the dollar market on Friday, it looks as though the market is pricing in a slow pace of rate hikes after the first one expected this month.

On Friday, the US dollar index gained just 0.7 per cent but gold jumped up 2.3 per cent.

Other precious metals too, made gains. Silver ended the week at $14.55/ounce, up 3.3 per cent. Platinum closed at $879/ounce, up over 5 per cent.

Reports say that gold buyers in the physical market have been buying more of the metal. In November, the US mint sold 97,000 ounces of American Eagle gold coins, up 185 per cent from October and 60 per cent from a year earlier.

Investors in gold ETFs, however, continue to sell holdings. SPDR Gold Trust — the largest gold-backed exchange-traded fund — reported its holding at 638.8 tonnes, down from the previous week’s 654.8 tonnes.

Cues to watch

The stage appears set for a rate hike in the US. Last week, the ECB did its bit to make it easier for the Fed by going against the broader expectations of an increase in stimulus and holding to the scale of the current bond purchases. This saw the greenback lose against the euro.

On Wednesday, the US dollar index fell from a high of 100.51 to 97.59 by the day’s close after the ECB news, mainly on a stronger euro.

Gold may not see a sharp downside from here as rate hikes have been expected for quite a while. It is already down about 40 per cent from its highs in 2012 when the talk of a rate hike emerged. With inflation (0.2 per cent in October, y-o-y) in the US still far below the Fed’s comfort zone (2 per cent), there is a possibility of the Fed going slow with subsequent hikes.

There is crucial support for gold at $1,044 levels — the February 2010 low. Unless this is breached, gold may trade positively, in the range — $1,050-1,100/ounce.

Below $1,044, the next support is far below at $980 levels, which looks unlikely. But that said, all data releases will be crucial.

The Fed is meeting on the 15{+t}{+h} and the 16{+t}{+h}. This week, the US economic calendar is relatively light with only the jobless claims number (on Thursday) and retail sales.

Indian bullion market

Though gold and silver prices in the international market have gained sharply, in India the stronger rupee has capped gains. The MCX gold contract gained just 0.8 per cent and closed at ₹25,267.

MCX Silver was up 2 per cent and ended the week at ₹34,424. The rupee was at 66.68 against the US dollar on Friday’s close after hitting a low of 67.01 intraday.

This week, currency movements will determine the loss/gain for bullion investors in the domestic market.

Technically, MCX Gold appears set for range-bound moves between ₹24,500 and ₹25,500.

However, if it breaks resistance at ₹25,700, it may well reach ₹26,000. Downside, the support is at ₹24,500 and ₹24,000.

MCX Silver may try to move past ₹34,500 levels this week. If it emerges successful in its stride, it may move towards the next target of ₹35,000.

However, if the contract moves south, it may slide to ₹33,000 this week again.

Published on December 06, 2015

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