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Where is Gold Headed? Squaring bullish and bearish factors

Publication Date: 20 Nov 2018 - By Kshitija Bhandaru By Kshitija Bhandaru
Actionable
Differentiated

Macro FX & Rates Investment Strategies Commodity Global Materials Metals and Mining

After seeing some setbacks, and with the Brexit talks taking centrestage, gold prices have regained some ground. On Thursday, November 15, December gold futures were up 0.4%, closing at $1,215 an ounce, and higher by 1% compared to Tuesday’s close of $1,201.40-the lowest it has seen in over a month. Spot gold edged up 0.3% at $1,214.05 per ounce.

Let’s look at the key factors that have been impacting gold prices recently.

US Dollar

The increase in gold prices came around as a result of the dollar easing off a 16-month peak it had hit earlier during the week. The dollar fell as the currency was caught in the crosshairs of geopolitical tensions and the greenback lost its appeal as investors sought safe-haven assets amid fear of Britain’s departure from the European Union.That being said, the US dollar index (DXY), which gauges the currency’s performance against six major rivals, recently hit its highest levels since June 2017. The rally in the dollar was supported by expectations of further US interest rate hikes and trade conflicts between US and China.

US interest rates

The US Federal Reserve is widely expected to raise interest rates next month. Higher rates tend to boost the dollar, pushing up bond yields and reducing the appeal for gold. However, Federal Reserve officials recently suggested that a pause in interest rate hikes may be seen in 2019. This is bearish for the dollar and could boost the appeal for the yellow metal. A weaker dollar makes dollar-denominated assets such as gold more appealing to foreign investors.

US-China Trade war

Trade conflicts between the US and China could also be seen as a major driving factor for gold prices. Tensions between US and China has caused the yuan to weaken, even as investors placed their bets on the US dollar, making gold expensive for China, a major metals importer. On the flip-side, trade war could also increase the perceived safe-haven attributes of the precious metal.

US President Donald Trump is expected to meet Chinese President Xi Jinping at the G20 summit in Argentina at the end of November. Most market participants believe that the two would hold discussions on the matter. A trade agreement between US and China would likely prove to be beneficial for gold prices.

Brexit

The uncertainty surrounding UK Prime Minister Theresa May’s Brexit plan will also be crucial for the fate of gold prices in the coming months. Resignations of major ministers in May’s cabinet might thwart her Brexit plan and has cast fresh doubts on her continued leadership. 

It would be safe to assume that the unfolding Brexit drama could induce safe-haven buying, so long as the dollar remains in check.

 

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