Gold loses sheen on dol­lar strength; rally over­due now

Financial Chronicle - - FRONT PAGE - SANGEETHA G

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.

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