It was strong opening for gold this week as gold neared its highest in a month on Monday amongst holiday thinned trade. A soft dollar and a pullback in equities helped this rise in gold prices.
Gold hit its highest level since May 1 on Friday at $1,269.50 an ounce, as nervousness over U.S. President Donald Trump’s negotiations with other world leaders at the G7 summit prompted investors to buy bullion as an alternative to nominally higher-risk assets such as shares.
Spot gold settled at $1,266.67 an ounce, little changed from $1,266.66 late on Friday.
Though there is not much rise expected in gold prices, but the news from G7 meeting pushed gold prices up.
Under pressure from the G7, Trump on Saturday backed a pledge to fight protectionism but refused to endorse a global accord on climate change, saying he needed more time to decide.
Apart from this, market players await next month’s FOMC meeting to get clearer picture on the U.S. Federal Reserve’s stance on interest rate increases. Gold is highly sensitive to rising U.S. rates, which
Increase the opportunity cost of holding non-yielding bullion,
While boosting the dollar, in which it is priced.
Meanwhile this week, market participants will stay focussed on the labour market report in the US slated to release during the week. If the data turn out to be positive, there is probably nothing to prevent the (Fed) implementing its next rate hike in mid-June.
The latest FOMC minutes suggest that the Fed may start decreasing its balance sheet later this year.
It is true that the first two rounds of quantitative easing were positive for the gold market. However, the third one was a disaster for the yellow metal, as the confidence in the U.S. economy came back and the safe-haven demand for gold declined. Therefore, the impact of the unwinding of the Fed’s balance sheet on the gold market is not easy to determine – a lot will depend on the broad macroeconomic picture.
On the one hand, the Fed’s shrinking balance sheet would imply rising long-term real interest rates, which would be negative for gold prices. On the other hand, there may be some turmoil in the financial markets, which would support the gold market. Moreover, it may be the case that the U.S. dollar rally which started in 2014 was caused by the rising expectations about the Fed’s upcoming tightening.
If this is true and investors really bought the rumour and sell the fact, then the greenback may start depreciating, which would likely send the price of gold higher. Gold’s response to the current Fed’s tightening cycle suggests that it is not impossible scenario. However, the whole process is likely to be conducted in a very conservative and cautious way to minimize market volatility and disruption. Hence, investors should not bet on doom scenarios and expect that the price of gold will necessarily skyrocket.
Though gold was not preferred in an investor’s portfolio during 2016, it gold regained investor confidence during 2017, as doubts about the Trump’s administration’s ability to see through their policy agenda and political difficulties have emerged. Moreover, there has also been a number of geopolitical events such as European elections – the results in France and Netherlands have somewhat assuaged financial markets – and the flashpoint in the Korean peninsula.”
These geopolitical tensions and uncertainties have influenced gold prices.
The spot price of gold jumped nearly 2% on the 17th of May, the most significant daily increase since the Brexit vote on May 2016. Political developments will be closely watched by the market, and could be a potential driver of additional uplift in gold prices going forward.
Comments by St. Louis Fed President, James Bullard, that inflation remains subdued, and the Fed’s interest rate expectations might be too aggressive, have also been supportive of gold.
Gold is expected to hover around USD 1250 an ounce and is further expected to range between USD1245 to USD1300 over 2017-18.