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6 Factors Controlling The Gold Market

By:
Barry Norman

Gold excelled last week soaring to $1174.30 adding almost $17 on Friday alone. Silver took its cues from gold to climb to 14.990 and could break the

6 Factors Controlling The Gold Market

gold dynamite forexw
Gold excelled last week soaring to $1174.30 adding almost $17 on Friday alone. Silver took its cues from gold to climb to 14.990 and could break the all-important $15 price this week. Platinum soared well above the $900 price to end the week at 913.70. Gains were supported by the drop in the US dollar which closed the week at 96.98 reversing losses to add 47 points late in the session on Friday.

gold v dollar

China set its economic growth projection range at 6.5% to 7% this year. That’s the slowest rate in 25 years. And efforts to curb overcapacity are expected to raise unemployment in some provinces. Keeping unemployment low is a top policy priority for China’s stability-fixated government.

Xu Shaoshi, chairman of China’s National Development and Reform Commission, said in a Wednesday news briefing that downward pressure on the world’s second-largest economy would persist in 2016. All three of those factors caused the price of gold to climb last week. Gold, an asset that thrives on uncertainty, has gained more than 7 per cent since the start of 2016 on concerns over the growth outlook, especially in China, after losing 10 per cent in 2015.

Slowing global growth, particularly in China, and its related currency devaluations are a cause of concern. The increase in interest rate by the US Federal Reserve and the rhetoric of more to come has signalled a policy normalization attempt as a threat to easy and cheap liquidity. All these evolving economic concerns weighed on global markets.

gold technicals

With the rally in gold prices, hedge funds and investors seem to be returning on the buying side. Managed money positions have turned net buy as per the Commodity Futures Trading Commission (CFTC) data at the end of the month compared to net sell at the end of December. Gold ETFs also saw good buying from investors to the tune of about 55 tonne in January.

While gold remains sensitive to movements in financial markets, it “will continue to be dominated by the outlook of the US Fed funds rate action” in the longer term. We have run past the Fed rate hike and the markets are now focusing on the extent of rate hikes. The Fed forecasts four rate hikes of 0.25% each in 2016, four hikes in 2017, and three in 2018. Its median forecast for December 2016 is 1.375% — the equivalent of four 0.25 percentage point increases from the current level of between 0.25 and 0.50%. Markets never bought that forecast, and they buy it even less after the recent FOMC meeting wherein Fed attempted a U-turn by trying to scale back their aggressive tightening stance.

gold

In what was a modestly more dovish tone, the Fed quietly downgraded its assessment of the economy by removing the reference from its previous statement that the risks to the economic outlook were balanced. The Fed took stock of a more perilous international picture that could alter its plans for further raising rates.

Wall Street remains over valued trading at high valuations, and therefore, offer a less attractive option for both US and foreign investors. Thus, investors would do well to recognize the shifting economic landscape by allocating a portion of their portfolio to gold. In a volatile asset environment and an era of experimental central banking, it’s difficult to forecast whether or not the bottom in gold has been placed. Given the macroeconomic picture, the downsides look limited in gold and this year will likely mark an inflection point in the yellow metal.

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