Gold prices to trade lower on US Fed rate hike concerns
New Delhi-India (Sept 8) In the past fortnight, equities across the globe traded mostly higher as rising prospects of easy monetary policy across the globe boosted gains. On the US front, hawkish comment by the US Fed Chairwoman, Janet Yellen, confirmed that the case for a rate hike in the coming months was strengthening, but provided little detail on Federal Reserve's next move.
With respect to the Euro area, there has been a slight pickup in Euro-zone's inflation rate as food prices have raised over the year, although the rate still lingered below the ECB's target level. Moreover, the Bank of Japan Governor at Jackson Hole meeting said that he won't hesitate to boost monetary stimulus if needed.
The Rupee appreciated by 0.56 per cent in the last fortnight after the RBI governor, in his foreword to the central bank's annual report for 2015/16, stated that the economy's prospects for the current financial year looked brighter than the previous fiscal year, but growth was still below potential. Moreover, heavy influx of capital into the domestic markets further acted as a positive factor for the currency.
Gold prices in the international markets declined by 1.24 percent while MCX gold prices declined by 1.54 percent in the past fortnight. Weak manufacturing data on the one hand raised concerns about slow industrial activity while initial claims for state unemployment benefits rose less than expected, pointing to sustained labor market strength. Investor focus was on the release on the US nonfarm payrolls report for August to see whether it will put the Federal Reserve on track to raise interest rates later this year. An upbeat payrolls report would reinforce the view that a US rate increase is likely before the end of the year. However, the payrolls report surprised many with less job additions. Also, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, posted the first monthly dip in four months in August creating pressure on gold prices.
LME Copper prices fell by 3.6 percent in the last fortnight and MCX copper prices declined 3.5 percent in the last fifteen days. Hawkish comments from the Fed members in the earlier part of fortnight saying the US central bank was close to hitting its targets for full employment and two per cent inflation, hurt demand for risky assets. Moreover, demand pick up continued to be a drag as customs data showed China's purchases of refined metal fell for a fourth month to 251,235 metric tonnes in July from 305,304 tons in June and 259,733 tons a year earlier, most likely due to weak summer demand and rising domestic output. Supply remains abundant as exports of unwrought copper and copper products from China, the world's top user of the metal, stood at 75,022 tonnes in July, a more-than-fivefold increase from the same month a year earlier. Also, persistent surge in LME stocks with stocks numbers increasing as much as 50 per cent at LME's Asian warehouses since mid-August, exerted pressure. Besides, the International Copper Study Group (ICSG) said in its latest monthly report that the copper market saw a deficit of 222,000 tonnes in the first five months of the year. ICSG said the deficit in May narrowed to 65,000 tonnes from a shortfall of 144,000 tonnes in April.
WTI and MCX oil prices declined 8.41 and 7.89 percent, respectively, in the past fortnight. Investors focused on the EIA inventory data, which showed a 2.3 million-barrel build in the US crude stocks in the last week, more than double what the market had expected. Inventories of distillates, which include diesel and heating oil, rose nearly 10 times as much as forecast. There were speculation that the Organization of the Petroleum Exporting Countries and other producers might agree to freezing production during September 26-28 talks in Algeria. That speculation has since fizzled, although Saudi Foreign Minister Adel al- Jubeir said last week that OPEC and non-OPEC oil producers were moving toward a common position on output.
Gold prices will trade lower as the possibility of rate hike by the US Federal Reserve has increased at present. The investment demand has also dipped in the recent weeks which will act as a negative factor for gold prices in the coming fortnight.
The oil markets are filled with oversupplies on one hand and inventories remain high on the other hand creating bearish sentiments. Although, there are talks of price stabilisation by the OPEC and non-OPEC nations, the glut of inventories in the OECD nations is creating pressure on oil prices. Hence, oil prices will trade lower in the weeks ahead.
We expect base metal prices to trade higher as recent strike in Salvador mine in Chile's Codelco will be supportive. However, investors will be cautious ahead of trade and inflation data from China due later this week.