Dollar bulls dim bullion outlook
Gold’s two-week rally on the back of safe-haven buying amid Syria tensions has subsided, as the USD bulls take charge. Rising bond yields and hawkish signals from the Federal Reserve seem to be giving impetus to the USD. The currency rose in the wake of Federal Reserve Governor Lael Brainard’s comments that the US economy appears to be able to sustain three more interest hikes in the near-term future.
During March and April domestic business sentiment in the US proved to be stronger in the wake of tax cuts introduced at the beginning of the year. The Federal Reserve described recent borrowing as ‘robust’, ‘solid’ and ‘healthy’, indicating more optimistic sentiment. Labour conditions are tight, meaning a strong demand for employees. There are even reports of difficulties in finding qualified candidates across a broad range of industries, prompting increases in salaries and incentives to attract them. Economic expansion continues to be moderate and consumer spending is rising. The Federal Reserve signalled that investors are shrugging off trade war fears in favour of borrowing and investing.
The positive sentiment trend doesn’t mean that all sectors are unconcerned about higher tariffs. The steel industry has started stockpiling materials in case of rising costs in the future. The construction industry shows a similar pattern, and the additional demand has fed into price rises which may boost overall US inflation. Concerns over high tariffs affect three main sectors; manufacturing, agriculture, and transportation, according to the Federal Reserve’s Beige Book.
Gold’s shine has dulled as sentiment improves towards the USD. Spot Gold prices shed around 0.2 per cent by the end of the third week of April, breaking a rising streak that lasted several weeks. Easing geopolitical tensions also
Investors appear to be focusing on profittaking in the precious metals market
contributed to the increased risk appetite. North Korea suspended nuclear tests and intercontinental ballistic missile launches after US President Donald Trump agreed to meet with its leader Kim Jong Un. Combined with a lull in Syria tensions, investors appear to be focusing on profit-taking in the precious metals market.
Another high priority for investors is the US stock market, which is in the middle of earnings season. The Federal Reserve’s hawkish outlook appears to be supported by stronger earnings reported by the majority of S&P publicly-traded companies. The prospect of higher interest rates is giving stock investors pause, however. Higher borrowing costs may dampen investment, and the main question is whether borrowing costs can be balanced with returns on investment given the modest rate of growth in the US economy. Investors may be heartened by continuing growth in the US economy but the boom the Fed is pursuing still seems to be a long way off.
The rise in the USD may also feed into underlying oil prices in one of several ways. Crude oil benchmarks may rise along with the currency increases and stockpiling. Then again, they may fall if investors are discouraged by the prospect of less affordable oil prices. What happens to the oil prices in the short term depends on global growth and cues from Opec going forward. In my opinion, Gold is still a contender for investment given simmering geopolitical tensions and weaker risk appetite in general, but given the circumstances at the time of writing, the USD is the asset to watch.