In 2016, gold was seen climbing 6% from $1050 to $1150 and another 10% gain during the first half of this year, in July and again in early August, gold prices dropped down to $1210, before rallying back up both times to $1290 and $1350 per ounce respectively. Wait, Watch and Then Work This back and forth price action has some investors worried if this is a real bull market in gold or yet another flash in the pan for the coveted yellow metal?
Reasons being more than one, Investors are returning to gold again to prudently diversify their stock-heavy portfolios. That’s very bullish for gold, as investment capital inflows can persist for months or even years. This shift is most evident in the yellow metal.
There are a couple of issues pushing and pulling at the market. The reaction to the missile launch last week has been a bit negated by that better-than-expected (US) inflation number
Spot gold slipped on Friday, shrugging off North Korea’s latest missile launch over Japan, with strong US inflation data raising the spectre of another interest rate hike.
Let’s have a look as to how each factor was responsible for this wave like movement in gold prices.
North Korea- North Korea fired a missile on Friday that flew over Japan’s northern island of Hokkaido far out into the Pacific Ocean, South Korean and Japanese officials said, further ratcheting up tensions after Pyongyang’s recent test of a powerful nuclear bomb.
US Data- Geopolitical risks can boost demand for safe-haven assets such as gold and the Japanese yen. The yen slipped against the dollar on Friday, after earlier having risen on the news, with the greenback supported by strong US consumer inflation data.
Gold pared losses after data on Friday showed U.S. retail sales unexpectedly fell in August and industrial output dropped for the first time since January due to the impact of Hurricane Harvey.
Friday’s numbers were in contrast to strong U.S. inflation data on Thursday which increased prospects of an interest rate hike in December. The Fed’s next monetary policy meeting begins on Sept. 19 and now the market is increasingly focusing on the Federal Reserve and its probability of another rate hike this year.
The Fed has a 2 per cent inflation target, and a series of subdued inflation readings have dampened expectations for further rate rises in the near term. Firming inflation could support the case for another rate hike. Interest rates tend to boost the dollar and push bond yields up, putting pressure on gold.
ECB- Gold fell on Friday after a European Central Bank official called for scaling back the bank’s stimulus programme; although losses were capped when weaker than expected U.S. economic data raised questions about further rate hikes.
ECB board member Sabine Lautenschlaeger made the most explicit call so far from an ECB policymaker for paring the bank’s 2.3 trillion euros money-printing programme.
Data showing that euro zone wages grew at their fastest rate in two years in the second quarter bolstered the case for reining in ECB stimulus.
This was rather a bad news for gold because this continues the trend of the market pricing in the normalisation of monetary policy.
But he said there had already been plenty of headlines about the ECB planning an exit from its bond buying and the U.S. Federal Reserve reducing its balance sheet after its big quantitative easing programme.
Those “normalisation” actions by central banks tend to drive rates higher, push bond yields up and put pressure on gold, a non-yielding asset.
Summing it up, though the previous week saw gold moving like a see saw; the focus now shifts to the important FOMC meet due on 19th September. Wait, Watch and then Work would be the only trading tip for the time being.