While when gold was just about to continue to maintain its 3 month high last week, there was a sudden pull back and gold prices moved lower by the end of the week
Gold steadied on Friday, but remained below the week’s three-month top as the U.S. dollar and Treasury yields came off their highs after the currency initially jumped on U.S. President Donald Trump’s promise of a major tax announcement.
Gold was being pushed and pulled amidst various factors that played key roles in influencing gold prices-
Interest Rate- Gold slid on Thursday from a three-month high in the previous session after strong U.S. economic data pointed to a robust economy, increasing the possibility that the Federal Reserve will raise U.S. interest rates.
U.S. economic data has also strengthened talk that the Federal Reserve would press ahead with U.S. interest rate hikes sooner rather than later.
Gold is highly sensitive to rising U.S. interest rates which increases the opportunity cost of holding non-yielding bullion while boosting the dollar in which it is priced.
Dollar and Data- U.S. economic data also underpinned the dollar. Initial jobless claims unexpectedly dropped last week to a nearly 43-year low, while inventories at wholesalers surged in December for a second straight month. U.S. import prices rose more than expected in January.
The data showing rising U.S. wholesale inventories and an unexpectedly low number of Americans filing for unemployment benefits further pushed up the dollar and U.S. bond yields.
A stronger dollar makes gold more expensive for holders of other currencies, while higher yields increase the opportunity cost of holding non-yielding bullion. Higher interest rates would lift yields further.
Tax Announcement- Donald Trump plans to announce the most ambitious tax reform plan since the Reagan era in the next few weeks, the White House said.
On Thursday, sending stock prices and the dollar higher on hopes leading to a cut in corporate tax rates.
French Elections- Investors are concerned about the strong showing in the French presidential race of far-right candidate Marine Le Pen, who has promised to take France out of the euro zone and to hold a referendum on European Union membership.
Gold held near 3-month highs on Thursday as political risks from elections in Europe and worries over U.S. President Donald Trump’s policies buoyed safe haven demand for the bullion.
While gold was stabilised by Friday. It was still amongst the favourites for investors. Many of them are being bullish for gold – Reasons being :
- Controversy over U.S. President Donald Trump’s temporary travel ban on people from seven Muslim-majority countries has recently boosted gold as a safe-haven asset.
- Further geo-political uncertainties, increasing hostilities in the Ukraine, Greek bailouts, French elections, Iran-U.S. sabre-rattling have supported gold prices and drawn interest from investors who seek support in safe haven assets.
- Investors’ bullish stance on gold is reinforced by an increase in net longs by speculators and a rise in holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund. (SPDR holdings rose 0.68 percent to 832.58 tonnes on Wednesday from Tuesday, rising for a sixth straight session.)
Increasing uncertainties has increased the demand for gold as a hedge. Amidst all this, gold prices are expected to rise till Mid Feb. Once January CPI data is released, it will give an idea about the possibility of a rate hike in March which will then be a deciding factor in the movement of gold prices.
By Mr. Prithviraj Kothari, MD, RSBL