Gold braced for Fed rate hike

Historical data shows that this isn’t the time to initiate shorts on gold



Gold has been lost for direction in recent weeks, moving sideways in the range of $1,060-1,080/ounce. Last week, it ended at $1,074/ounce, down 1.1 per cent. But the action may now begin. The Fed may be all set to bite the bullet. In its meeting on December 16, expectation is that the central bank may increase rates by about 25 basis points for the first time in seven years.

The action would be supported by strong US data. US unemployment rate has come down to 5 per cent from about 9.5 per cent in 2009. The increase in average hourly wages paid to workers is at 2.3 per cent (annualised) compared to 2-2.1 per cent for very long. Inflation is at 0.2 per cent, but core inflation excluding fuel and food is 1.3 per cent, closer to Fed’s 2 per cent target.

The outflow from gold ETFs continues. SPDR Gold Trust, the largest gold backed exchange traded fund, reported total holdings of 634.63 tonnes of Friday, down from 638.8 tonnes in the previous week. Though the general market perception is that as rates go up, non-interest bearing investments such as gold may lose sheen, this has not been true in the past. Mulling the data on US interest rates for the last 20 years, we see that gold prices move up during a sustained uptrend in US rates. In 2004, 1999 and 1994, gold prices gained 5-10 per cent in the six months after the first/second rate hike. For instance, in the year 2004, between June and December, short-term rates in the US went up from 1.25 per cent to 2.25 per cent. Gold prices rallied up by 11 per cent in that period and the US dollar index plunged 9 per cent.

Bullion traders looking to initiate short positions should, therefore, watch out. Last week, while gold ended down, the US dollar index too lost about 0.8 per cent to close at 97.565. Platinum and silver dropped over 4 per cent to close at $840/ounce and $13.9/ounce respectively.

Cues to watch

The Fed’s decision on rates and forecasts for GDP and inflation will be known on Wednesday. Until then gold, other precious metals and the dollar are likely to remain volatile. There are many other key data releases also scheduled for the week. On Tuesday the US Consumer Price Index will be released. After a 0.2 per cent increase in October, November month’s inflation is expected at 0.4 per cent. On Wednesday, with the FOMC announcement, housing starts and industrial production data will be released.

The global financial markets have been preparing for the Fed rate hike for three years now. A hike of up to 25 basis points in rates is already factored in, but, still there may be some wild swings in the market this week, so trade with strict stop-losses.

Gold prices may move down but are likely to hold above the support of $1,046/ounce. On the higher side, they may not move above $1,090/ounce. Technically, only above $1,100/ounce does it look safe to buy into the metal.

Follow rupee

While gold prices in the international market declined, domestic market traders made a gain of 1.6 per cent on their gold futures contract, thanks to weaker rupee. The Indian currency weakened to 66.89 against the dollar from 66.68. MCX Gold futures contract closed at ₹25,679. However, the silver contract dropped by 1 per cent and ended at ₹35,359, given the sharper losses in international silver prices. In the short term, the rupee may be the saviour for domestic investors of bullion. The MCX gold futures contract wasn’t able to break through its resistance at ₹25,700 levels. Though it touched ₹25,747, it couldn’t sustain at those levels and dropped to close at ₹25,679. This week, if the contract breaches the resistance at ₹25,700 levels and reaches ₹26,000, it can gain even further. However, if it reverses from current levels, it could target ₹24,500 levels.

MCX Silver hit its target of ₹35,000 last week as we had indicated. However, since it saw a sharp correction tracking international market prices and closed at a low of ₹33,983, it opens the doors for ₹33,000.

Some good news for domestic investors is that the Indian Bullion and Jewellers Association in Mumbai is tying up with the Bombay Stock Exchange to open the first physical gold trading exchange in India. The Association is likely to hold a 70 per cent stake in the exchange. This could help the country’s investors in the physical gold market trade in the metal, in rupee terms.

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