Gold price outlook: Check trajectory as US Fed, fear of trade war lift rates

Gold price outlook: US Fed Chair, Jerome Powell, went with the market expectations and hiked federal fund rate by 25bsp to 1.50-1.75 range, well priced-in event for any of the asset classes having correlation to it. Only little bit of a short-term disappointment for those who had expected US Fed to deliver faster pace of a rate hike for a remaining part of this year. Well, as we all know they always change their stance in such a way that will have bare minimum impact on the financial markets, otherwise billions of dollars get eroded in a fraction of a second, forget about minutes or an hour. They upped real GDP projection for 2018 to 2.7 per cent and for 2019 to 2.4 per cent from December forecasts of 2.5 per cent and 2.1 per cent, respectively. Well, can’t it be taken as a hint for a faster pace of rate hikes in coming years, if not in 2018.

Recent five rate hikes seen by the market in ongoing cycle have produced a consistent price behavior as gold was sold off ahead of the move and rallied strongly post the announcement of a rate increase. Even this time also gold remained weaker almost for a fortnight before 6th rate hike was announced on March 21st and soon after its prices rallied strongly to finish “Event-Day” by about $20 higher from the opening prices, massive single day surge in a month, hinting likelihood of a rally in the days ahead.

Fears over “Global Trade War” that may take a slice of growth from global economies and prevailing middle-east concerns are also supportive for gold this time. Earlier Trump administration imposed 25% duty on steel import and 10% on Aluminum import and last night US President Donald Trump slapped tariffs on at least $50 billion of Chinese imports. China didn’t fear a trade war with the US and announced reciprocal tariffs on $3 billion of imports from the US in the first response to Trump’s order. The US will impose 25 percent duties on targeted Chinese products. This will distort global traders, a step heading closer to protectionism from globalisation. 

HIGHLIGHTS

• Gold prices gained on dovish FOMC stance, weak US dollar.
• US Federal Reserve hikes interest rate, upgrades growth outlook for 2018 and 2019.
• USD slipped as Fed didn’t comment about faster pace of rate hike for this year.

All financial sites are fully loaded with a story of a dollar's weakness even after Fed hiked a rate last night due to their dovish stance as they didn’t touch future pace of rate hikes topic but despite all the odds USD is moving within a 2-month long consolidation range of 88.15 to 90.90, break of it will pave the way for a directional move, till then, criss-cross will continue. If USD slips below 88, certainly it will be a biggest booster for commodities including gold. Whether it will break or not, we don’t want to speculate about it but dollar is likely to remain weaker over a period of medium-term as global economic recovery will be faster than the US and, other central banks, mainly ECB and BOJ, will soon begin unwinding ultra loose monetary policy at a faster pace.

Gold is expected to do well over medium-term as robust global economic growth will fuel inflationary concern sooner or later and it is among the best hedge against the inflation. But for medium-term, we believe silver will do better than gold. Gold to silver ratio is hovering around 80, showing underperformance of silver but historically this ratio peaks around 80, making silver as the best alternative to gold. As we all know, silver market is less liquid and smaller than that of gold, due to which prices of silver tend to react in more vulnerable fashion either way than gold. That’s why silver corrects more in a major bear market and gains more in a major bull market if other things remain the same.  

Prices trajectory: Prices have seen consolidation between $1303 and $1370.5 after hitting a 2018’s high of $1370.5 per ounce on January 25 and recently have skewed its momentum in the range of $1303 to $1343. Breakthrough above $1343 will extend momentum for few days towards $1365-$1375, which is a crucial selling zone seen since mid-2014. Prices have to sustain above $1375 for resuming a medium-term rally otherwise, time consolidation will prolong for some more time. While, on downside, break of $1300 will trigger selloff for short-term.  

(By Tarun Satsangi, Head- Commodity & Fx Research, Globe Commodities)