Chances of interest rate hike in near future fade

Initially gold began on a negative note. Gold witnessed a decline in prices till mid-week.

However by the end of the week gold prices picked momentum and closed on a positive note.

GOLD BULLION headed for a second weekly gain versus the falling Dollar Friday morning in London, trading at $1247 per ounce as the US currency held at its weakest in 14 months against the Euro.

The greenback faced a fresh barrage of assaults on the currency markets. June retail sales figures and inflation levels disappointed, and this led to a selloff of USD. Headline inflation plunged more than forecast, and retail sales reversed course.  Hence, sentiment towards the USD declined

Gold and the rest of the precious metals were up by an average of 0.3% during trading hours on Friday July 21, with spot gold prices at $1,246.44 per oz, a weaker dollar and continued choppy political waters in Washington providing support.

By Monday, 17 July, the greenback was trading near 10-month lows. Further, news reports of improved economic performance in China sent investors scampering away from the USD towards other assets. Safe-haven assets such as gold, silver, platinum, and the JPY and emerging market currencies gained favour as the USD retreated.

Gold’s rebound found new drive on the combination of the weaker dollar, which we think stems from the weak political scene in Washington and from the less hawkish US Federal Reserve stance.

A weakening dollar along with hawkish Fed comments strengthens gold prices as gold is generally preferred as a mode of investment in times of uncertainty and global turmoil.

It is clear that the US economy is not performing as expected. This naturally dampens expectations and results in weakness for the USD. When traders get antsy, they rush towards safe-haven assets such as gold bullion, and this is precisely what we are seeing now.”

The dollar index continued to fall, at 94.00 it has set a fresh low, these levels were last seen in June 2016. A negative impact on the USD is good for gold. Since bullion is a dollar-denominated asset, demand moves in the opposite direction to the strength of the USD. With weakening sentiment about the USD, foreign buyers of gold purchase more per unit of their currency. Plus, the perceived weakness of the USD drives traders to gold bullion.

With softness in inflation figures, members of the Federal Open Market Committee (FOMC) are reluctant to move forward with additional interest rate hikes. It is more likely that the Fed will opt for an unwinding of its $4.5 trillion balance sheet than more rate hikes this year.

If data continues to be negative and if the third-longest [economic growth] cycle in US history cannot produce a cyclical uplift in wages and prices then gold prices are expected to rise tremendously as any large disappointment in the [global economic] growth story will lead to an increase in gold prices.

The appeal of gold as an insurance asset is greater today than it was at the beginning of the year. It suggests to us that gold continues to be viewed as a [portfolio] diversifies and this should help keep the market supported overall.

The latest economic data releases once again bring the prospect of a Fed rate hike into question. According to the CME Group Fed Watch Tool, there is a 3.1% probability of an interest rate hike on Wednesday, July 26, 2017. For September 20, 2017, the probability of a rate hike is just 8.2%, and for November 1, 2017 the probability of a rate hike is just 11.6%. These economic forecasts are good for gold. Every time the Fed pushes back the prospect of a rate hike, currency traders take a bearish perspective on the greenback which further drives the demand for gold.

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