Recently investors have begun flocking to traditional safe-haven assets like gold and eschewing more risky stores of wealth as 2016 has been characterized by frazzled markets and mounting tensions stemming from the global equities rout.
In recent days, the rally has been driven by erosion in the dollar, which is down to October lows and was last trading 1.2 percent softer at $1.1220 against the euro.
Gold is once again gaining its safe haven appeal as it gets influenced by depressed oil prices and low inflation. These factors are raising concerns over Fed policy expectations and global economic development.
A potential slowdown in the American manufacturing and services industry has created questions over the timing of the Federal Reserve rate hike and target of roughly a two percent fed funds rate by year end.
A majority of market participants do not see a rate hike happening this year, compared to a week ago when consensus was for an increase in July.
Earlier this week, Federal Reserve Bank of New York president William Dudley said that tighter financial conditions would be taken into account at the next Fed policy meeting in March – investors interpreted this as a further delay in a US interest rate hike.
As markets await further news from the Fed, they were also awaiting the US jobs reports to see whether it created a negative or positive impact in the economy.
Trade was volatile following a mixed US employment report, which showed that 151,000 jobs were added in January, missing the 189,000 forecast. However, the unemployment rate did tick down to 4.9 percent and wage growth was strong. December meanwhile was revised down to 262,000 from 292,000.
However, after years of low wages and non-existent inflation, wage growth increased the most in a year at a 0.5 percent gain, besting the estimate of 0.3 percent.
A substantial wage boost shows the labor market is beginning to tighten and it is becoming more difficult for employers to find available workers.
That news along with the reduction to 4.9 percent in the headline employment figure was enough to spur the dollar after it had sunk to the lowest point since October. The greenback last traded 0.8 percent stronger at $1.1127 against the euro.
Gold futures edged higher after trading in negative territory throughout most of the day as a downturn in US equities offset a stronger dollar.
Now it’s becoming clearer that the lows for dollar denominated gold have been seen after an extended, weakening four year bear market.
The deterioration in the American currency begins as a global equities rout hit all three major economic regions led by fears of a possible US recession and hard-landing in China.
Investors have questioned the timing of the Federal Reserve’s first rate hike and now don’t expect another increase until the second half of 2017, according to the CME Group Fed Watch.
The global macro environment has so far been positive for the precious metals market.
The poor start to the year has investors questioning the timing of the Federal Reserve’s first rate hike, with various Fed members stating the Fed’s policy would monitor and assess financial conditions.
Before the global uncertainty, March was estimated to be the next date for another rate increase as the Fed needed a gradual schedule to reach the target of two percent by year-end.
After weeks of global instability and central banks favoring looser monetary policy, investors have increased their gold ETF holdings, which stood at 1,573 tonnes as of February 2 – a gain of 22 tonnes week-on-week and 92 tonnes month-on-month.
Keeping in mind the global economies, gold prices are expected to strengthen in the near-term, driven by improved spec and investor sentiment, but we do not expect prices to break above the $1,200 psychological level.