Gold loses sheen on dollar strength; rally overdue now
AN upside rally is long overdue for gold. Prolonged strength in US dollar has been depriving the precious metal an opportunity to gain from macro economic developments that could have triggered safe haven demand for gold. However, once the greenback starts losing its strength, the entire narrative can turn in favour of gold, say analysts.
Between January and first week of June, spot gold prices in the international market have been trading in a range of $1,350 and $1,290 per ounce. Though prices touched the upper end of $1,360 a couple of times, it could not sustain those level as the dollar index was rather stable between 88.50 and 91 levels.
Once the dollar started strengthening in the first week of June, gold breached a key support level of $1,250 and technical selling ensued as prices fell to $1,180 levels.
“The US Federal Reserve maintained its hawkish stance and continued raising interest rates. The GDP data and those pertaining to farm and non-farm pay rolls have been showing a steady improvement. This has been strengthening the dollar,” said Himanshu Gupta, vicepresident, head of commodities and currencies research, Globe Capital.
“Usually investors flock to safe haven assets like gold during the times of uncertainty. But that did not happen when the Turkish lira depreciated significantly as the dollar remained strong,” added Jateen Trivedi, technical research analyst at Bonanza Portfolio. Dollar has gained from the weakness of most of the emerging market currencies.
“At one time, the equity markets were overheated and a correction was looking imminent due to an impending trade war and uncertainties in Trump administration. However, the tax cuts for corporates benefitted consumer spending and continued to boost the sentiments in the equity markets. Further, the geo-political tensions that could have cropped up from the standoff between the US and North Korea too dissipated by then,” said Gupta.
However, all the factors that can turn the table in favour of gold have not disappeared. CPI inflation in the US, which stood at 2.1 per cent in January, moved up to 2.9 per cent by July and has not eased. Global equity markets are still at vulnerable highs and the rising bond yields continue to be a cause of worry. “Dollar till now has gained from the trade war with China. However, if other nations join the trade war and the tariffs start affecting the US economy as well, things can reverse for the dollar,” said Trivedi.
China, which has trade surplus with the US, would be affected first by the trade war. However, sooner or later it will start affecting the US economy as well. “If Chinese demand for natural gas or industrial metals is affected, it will have a rippling effect on the US companies and their earnings will determine the further course of the equity markets and US economy as a whole,” said Gupta. Further, strength in the euro can also undermine the prospects of dollar. The European Union has been planning to end the stimulus programme and tighten its monetary policy.
Moreover, even the US will not let the dollar keep on strengthening as it will hurt the export sector. US president Donald Trump in the past has expressed his objections to a strong dollar, though this was not followed by any action.
Any weakness in dollar will turn the table for gold and any sustained upside will be backed by several other factors that will further keep up the momentum in the metal. Gold ETFs have been continuously witnessing outflows in the past several months. Once the prices catch up the upward trajectory, investors will return to gold ETFs.