Feb 02, 2017 05:45 PM IST | Source:

Time to be cautious on gold given too many events

From an Indian investor‘s point of view, this week will be more important as the RBI‘s monetary policy is due.

Ravindra Rao

January has been positive for both precious and industrial metals. After having fallen since the US election, the price of gold has risen since Christmas as investors worry that Trump's trade-protection policies would hurt economic growth. It has also benefited from recent volatility in the US dollar. And, now, the first week of February will be loaded with much economic data. The BoJ, the BoE and the Fed will be meeting to discuss their monetary policies. The US non-farm payroll figure will be out on Friday. China’s markets will be shut for its Lunar New Year holidays. Hence, the dollar is likely to be volatile. The pattern in the gold-backed SPDR ETF has not changed although withdrawals have been slow. The Fed is almost likely to keep rates unchanged this time. Nevertheless, statements after the meetings would be important for investors.

For almost a decade, the biggest trigger for market sentiment has been Central banks, at least from 2008. Today, the market has come a long way since former Federal Reserve Chairman Ben Bernanke unleashed the first round of quantitative easing in the U.S., in March 2009. Investors are watching and will continue to keenly watch the 45th president of the US, Donald Trump, as his protectionist policies and push for ‘America First’ are likely to affect many countries and markets in varied ways.

Of course, his ‘America First’ policy, if implemented successfully, would create jobs in the US, putting the Fed in a comfortable position to raise the benchmark interest rate in 2017. Even Trump’s infrastructure plans would boost miners’ spirits, but his move on immigration is likely to keep the dollar on the back foot and gold on the higher side. On the other hand, his measures to help inflation climb and create jobs would have a negative impact on the yellow metal in 2017. In the past, gold was considered to be safe haven, and any turmoil – natural, political or economic – drove demand for gold not just in India but around the world. For instance at the time of the US presidential elections, gold prices swung both ways. Now is a crucial time for the yellow metal. The move in the dollar would be very important for commodities. Trump has completed his first week at the White House and has already made it to headlines of newspapers. The wall along the border with Mexico, the executive order on immigration and the extreme vetting of refuges are some orders he signed. However, after two days of chaos and confusion, on Sunday, 29th January, Trump amended the order, announcing that permanent residents (green-card holders) from seven majority-Muslim countries would in fact be allowed to enter the US.

The U.K. government is battling in the Supreme Court to trigger Article 50, which sets out the process by which member states may withdraw from the European Union. Therefore, everything points to one thing, that a political flavour would determine any momentum. Although there are chances that the yellow metal would lose its shine, investors are cautious because of the political uncertainty in the U.S. Hence, gold may not lose too much.

From an Indian investor’s point of view, this week will be more important as the RBI’s monetary policy is due. According to official government data, India’s gold imports in December in dollar terms contracted 55% from November. While the government does not attribute a reason for the change in import and export trends, volatility in gold imports may be linked to the government’s decision to withdraw Rs.500 and Rs.1,000 notes. The lack of cash in the system likely crimped demand for gold in December. Also, demand for jewellery during the final leg of the marriage season in India (February and March) can’t be ignored. Technicals show Comex gold looks good only at a close above $1,225 (Rs.28,850, the April contract on the MCX). Another interesting observation is the 100-day moving average, which is around $1,220 (Rs.28,750). On the weekly chart, a lower-top, lower-bottom can be seen. On the lower side $1,175 (Rs.28,050) and $1,162 (Rs.27,500) two supports. During a week of so many economic releases, we recommend traders to be cautious.

Ravindra Rao is head –commodity research & advisory at AnandRathi Commodities.
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