Dollar gains, gold slips, on rate hike buzz

With the Fed getting ready for the next rate hike, where is the yellow metal headed?

The price of gold has come off from its peak levels. From about $1,304/ounce at the beginning of the month, the metal is down to $1,212/ounce now. Growing expectation of a Fed rate hike in June that stoked the dollar led to the fall in the yellow metal.

The US dollar index, which measures the greenback against other major currencies, has risen from 92 to 95.5 over the past month, as talk of a possible US Fed rate hike is once again doing the rounds.

All key data points that have been released in the last one month point to the US economy’s improving health. Industrial production in April surged the most since November 2014. Though only a 0.7 per cent increase from March, the pick-up in demand for electricity and natural gas, which drove the output in utilities, is a positive sign.

The new home sales in April reported last week was the highest in the last eight years with an increase of 16.6 per cent sequentially, signalling a pick-up in economic growth and improved consumer confidence. The consumer price index rose by 0.4 per cent in April, the highest ever since 2012. The labour market too showed an improvement with a strong jump in non-farm payrolls in April. Retail sales increased by 1.3 per cent in April over March, the biggest change since March 2015. Some experts believe that the green shoots visible are reason enough for the US central bank to hike rates in June, given that it has always emphasised that rate action will be ‘data-dependent’. However, ‘dot-plot’ — the Federal Reserve’s interest rate forecast — holds a 34 per cent chance for a hike next month. The CME Fed fund futures, which is a reflection of the market’s expectation, holds a 28 per cent chance for a rate hike in June (up from 4 per cent in the beginning of May) and a 50 per cent chance for a hike in July.

Cues to watch

History suggests that whenever the Federal Reserve hikes rates, after the first few months, gold starts to move up fast. We looked at the data on US interest rates for the last 20 years. In 1994, 1999 and 2004, gold gained about 5-10 per cent in the six months following a rate hike. In the year 2004, for instance, between June and December, when short-term rates in the US went up from 1.25 per cent to 2.25 per cent, gold prices rallied by 11 per cent.

Even after the December rate hike, we saw gold prices move up. So, given the past trend, it may be wise for you to hold on to your investments in gold now.

This week, there are key data releases in the US, including the ISM Manufacturing Index on Wednesday and the employment situation statistics on Friday. So, both the dollar and thus bullion could be very volatile.

What the charts foretell

Last week, gold prices in the international market corrected about 3 per cent to $1,212/ounce. The pace at which the metal has been sliding in the last few weeks suggests higher volatility in the coming days too.

If data releases in the US this week signal a further improvement in the economy, the metal may lose its sheen further. However, $1,200 still appears like a strong support and breaking it may not be easy. But if $1,200 is broken, the metal may plunge further.

MCX Gold was down 3.6 per cent last week and closed at ₹28,603 and MCX Silver ended 2.4 per cent down at ₹38,866.

This week, MCX gold futures contract may move down further to break the support barrier at ₹28,500 and target ₹28,000. On the higher side, resistances are at ₹29,000 and ₹29,800.

MCX Silver may also follow the broader trend in gold prices. The contract has an immediate support at ₹38,800, below which it may drop to ₹37,700/37,750 this week. Resistances are at ₹39,000 and ₹39,800.

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