Fed puts the dollar in red

Gold is traditionally used to hedge against economic uncertainty. As sanctions fall into place and the screws tighten on other nations, the U.S. dollar loses power within the world economy.

Where 2011 gold saw its life time high at 1917.90, in 2015 it bottomed at $1047. That was followed by a 31% rally to $1375 in July 2016, since when gold has established a triangular consolidation pattern. Last August, the price sold off to $1160, becoming oversold to record levels. That established the second point of a rising trend, marked by the lower solid line.

As 2019 started, gold was seen on a positive note. Gold has rallied and established support at $1280-$1305. And it is expected to move further from here.

Last week, Precious metals surged upward in Asia-Pacific trading, building on gains from Wednesday following a dovish construed U.S. Federal Open Market Committee.
Gold has been as high as $1,319.80.

While the dollar saw some respite from the late New York declines, precious metals continued to firm as participants considered the implications of the Fed’s growth projections.
Gold saw the $1,310 pivot level remain intact, while seeing a generally orderly ascent throughout the session toward $1,320.

Global markets look deteriorating in the new future. Hence we will see a rise in government borrowing in the deficit countries. Dependency on dollar denominated assets will reduce.

Once again Gold has established itself as an asset with great safe haven appeal. It has become the investor’s favourite due to many reasons and is expected to do so in the near future too.

Reasons being-

Global economies- wave of monetary inflation suggest that the dollar-based financial order is coming to an end. But with few exceptions, investors own nothing but fiat-currency dependent investments. The only portfolio protection from these potential dangers is to embrace sound money – gold. And hence demand for the yellow metal will rise resulting in an increase in its prices.

Dovish comments from FEDSome speculators appear to have gambled badly on the likely content of U.S. Fed chair, Jerome Powell’s latest statement following Federal Open Market Committee (FOMC) meeting.  Ahead of the statement the gold price dipped back under $1,300, albeit briefly, for the first time in several days.  But following the release of Powell’s statement it surged higher hitting the $1,320 level very briefly for the first time in just over 3 weeks.

Monetary policies- The global economy is at a cross-road, with international trade stalling and undermining domestic economies. Some central banks, notably the European Central Bank, the Bank of Japan and the Bank of England were still reflating their economies by suppressing interest rates, and the ECB had only stopped quantitative easing in December. The Fed and the Peoples’ Bank of China had been tightening in 2018. The PBOC quickly went into stimulation mode in November, and the Fed has put monetary tightening and interest rates on hold, pending further developments.

Central bank buying- Russia is not alone in seeking to diversify out of U.S. debt holdings and transfer wealth into precious metals. As Per the World Gold Reserve, Gross purchases of 48 tonnes (t) and gross sales of 13t led to global gold reserves rising by 35 tonnes on a net basis in January, with sizable increases from nine central banks. This is the largest January increase in gold reserves in our records (back to 2002) and illustrates the recent strength in gold accumulation.

The primary factor cited in gold purchases seems to be global economic uncertainty. If sanctions grow tighter and more numerous, the global economy will continue to shutter. The stage is ready for gold transfers in the hundreds of tons this year, with several countries building growing gold stockpiles.

Rate hikeThe latest statement was interpreted as predicting no further Fed interest rate increases this calendar year and perhaps only one rate rise next year.  It was further interpreted to suggest no rate rise in 2021, but that is, in reality, too far ahead for this position not to be materially altered one way or the other at a later meeting. A delay in a possible rate hike has compelled gold to move higher. And if it continues to do so till 20121, as expected by many market players, then we will gold reach new level highs in a few years. Bur back to Powell’s post-FOMC meeting statement.  There wasn’t anything too surprising in it – or at least there shouldn’t have been – as it largely confirmed what most economic analysts had been predicting regarding Fed tightening over the next several months.  But then perhaps the aforementioned analysts needed semi-official confirmation of their assumptions.

Inasmuch as worries about Fed rate rises had been instrumental in keeping the gold price restrained over the past two to three years, the prospect of the Fed backtracking should be positive for gold and negative for the dollar were it not for a similar, or worse, downturn in the global economy.  This may keep the dollar stronger than the Fed, or President Trump, would like.  That correlation would tend to boost imports and hinder exports, thus exacerbating America’s already dire current account deficit and countering any positive effect from the Trump tariff impositions.

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