Gold prices have rallied 31.4 percent since the December low at $1,046.40. Safe-haven demand increased due to the following factors:
- The US Federal Reserve proposed in December four rate increases in 2016 but at best it might deliver just one rise before the end of the year
- Its inverse relationship with the dollar index has allowed gold to climb
- The growing number of negative-yielding sovereign bonds has made safe-haven assets that bear no yield much more appealing
- Pro-long utilisation of easy monetary policies by global central banks has eroded the value of paper money
- Speculative funds as well as ETF investors have flocked into gold in search of yield
Though 2016 has been one of the best performing years for gold since 2012 theyellow metal registered its biggest daily drop in three years on last Tuesday and extended losses in the previous session after forecast-beating U.S. manufacturing data and comments from Fed officials saying there was a strong case for raising rates.
Gold fell for the eighth straight session on Thursday, slipping to a four-month low, pressured by a stronger dollar after U.S. weekly jobless claims fell and ahead of key data that could put the Federal Reserve on track to raise interest rates this year.
Gold fell for a ninth straight session on Friday on a stronger dollar ahead of key U.S. jobs data and the metal was headed for its worst weekly dip in over three years on increased expectations of a Federal Reserve rate rise by year end.
Initial claims for state unemployment benefits unexpectedly declined by 5,000 to a seasonally adjusted 249,000 for the week to Oct. 1. The U.S. dollar .DXY rose to the highest in more than two months against a basket of currencies as the data reinforced the view that the Fed would raise rates at the end of the year
This declined gold prices drastically but by the end of Friday gold futures staged a modest recovery amidst all these concerns.
Though the unemployment benefits declined, a slow growth rate was recorded for the third straight month in September. Gold prices got an initial boost from this.
In Europe, the European Central Bank (ECB) intends to push on with its aggressive stimulus policy of negative interest rates and massive bond buying until it is happy with the outlook for euro zone inflation, senior officials said. ECB Vice President Vitor Constancio said a Bloomberg report suggesting that there was already consensus among ECB rate setters to reduce the 80 billion euros ($89 billion) monthly bond purchases was mistaken.
The report aggravated a sell-off in gold on Tuesday as the yellow metal fell over three percent to its worst one-day fall since September 2013.
In the short term, gold prices might remain under selling pressure. While the metal could consolidate lower and put the bulls to the test, it remains to be seen how long or deep the consolidation process will be. But we remain friendly towards gold – our medium-to-long-term view remains bullish and we could see the metal seeking a strong technical support to rebound into.
But there are chances that gold might trade sideways in the short term keeping in mind the following factors-
- Strained projected longs show that this trade is very much overcrowded. With no fresh buyers, the path of least resistance is downward
- Profit-taking could be a theme and, should panic ensue, panic selling could escalate as speculators and ETF investors are sitting on large unrealised profits
- The bulls’ bounciness has not really been tested and a mild correction/pullback should do the overall bull structure a lot of benefit
- Physical demand has been subdued due to high future prices – the current rally has not had the backing of strong physical up-take
- The Fed has armed its policymakers to prepare the market with combative messages that the US economy is primed for a 25-basis-point-rate rise before the end of 2016
These put a limitation to the bullish trend for gold. Nonetheless as we approach towards the last quarter of 2016 we all hope that it ends on a similar note as its beginning.