Hawkish Fed stand means more price correction in gold

By Prathamesh Mallya

Gold price hit a high of $1,340 per ounce on February 26 and corrected towards $1,300 over the past fortnight. It’s trading at $1,309.

The graph went down nearly 1.5 per cent in international markets and 1.01 percent on the MCX in the same period.


The recent weakness in the yellow metal can boil down to the following factors.

US Federal Reserve chief Jerome Powell said rate hikes should continue despite the added stimulus of tax cuts and government spending. The central bank has also signalled three rate hikes in 2018, in turn pressurising gold prices. The dollar index also recorded its best monthly performance since November 2016, bolstered by Powell's hawkish stance.

The data from the Perth Mint, Australia's official bullion mint, indicated that sales of gold products fell in February for the first time in three months. The figure for gold coins and minted bars declined 29% to 26,473 ounces in February, from 37,174 ounces a month ago.

But uncertainty arose from Trump’s announcement to impose hefty tariffs on imported steel and aluminum to protect US producers, sparking fears of an imminent trade war. This, in turn, bolstered demand for safe haven.

IMF chief Christine Lagarde also suggested positive and negative effects of a "complicated" US tax overhaul, including a near-term growth bump that risks overheating the US economy and a problematic rise in debt.

The CFTC position points to weakness in gold prices as speculators cut their net long positions by 16,153 contracts to 1,45,659. Also, strong US jobs data have shored up expectations of more rate hikes, going forward.

Outlook
Easing tensions between the United States and North Korea, strong non-farm payroll data, lacklustre investment demand for gold as seen in the SPDR gold trust holdings and a stronger dollar index will keep prices subdued in the near term.

Growing US political uncertainties following the recent departure of two key officials, former secretary of state Rex Tillerson and Trump’s former top economic advisor Gary Cohn, have left investors worried.

The rate hike signals from the Fed event will only spell price correction in gold.

We expect spot gold prices (CMP: $1,309/oz) to trade lower towards $1,280 in the coming fortnight and those of MCX gold (Rs 30,131/10 gms) dropping towards Rs 29,500 in the same timeframe.

(Prathamesh Mallya is Chief Analyst, Non-Agri Commodities and Currencies at Angel Broking. Views expressed in this column are his own and do not represent those of ETMarkets.com. Investors should consult their financial advisers before taking any investment calls based on this article)