Gold bulls heading for a heart break

London (Feb 7)  Robust US jobs data, likely rate hikes and poor Asian demand show red flag for the bulls. Gold has immensely benefited from a certain weakness in the US dollar in recent times. In January alone, the price escalated by about $30 an ounce to touch $1,350 on January 26. This encouraged gold bulls to believe that there was further upside to be explored.

However, following the release of the US jobs data last Friday, which showed that non-farm payrolls added 200,000 jobs in January, the dollar moved higher and gold prices slumped to $1,329/oz.



Rate hikes imminent

What’s the outlook from here on? Clearly, the support the precious metal received from dollar weakness may be coming to an end. Given the jobs data and rise in average hourly earnings, it is widely anticipated that the US Federal Reserve will press ahead with a rate hike as early as March.

At least three hikes are on the cards for 2018 and a fourth one is not ruled out either. Of course, the decision on rate hike will be data-driven. This is sure to lend support to the dollar which is now beginning to reverse its direction of the recent months.



Weak demand

Another factor to reckon with is the demand side. If anything, demand has been subdued in the global market, especially in major markets — China and India. Globally, demand for the yellow metal fell to multi-year lows in 2017. Investment demand was weak as investors had better options and the steady increase in US rates was a discouraging factor.

For the rest of 2018, the ongoing weakness in demand is expected to persist, especially in major Asian markets. So, in all likelihood gold consumption will decline this year too. Demand weakness, in combination with stronger dollar, may mean less-committed gold bulls will exit the market. If equities begin to improve, there will be additional pressure.

In this scenario, gold prices can be expected to gradually move down to breach $1,300/oz levels by the end of this quarter and possibly test $1,250 in Q2.



Budget and Gold

One cannot ignore the upside risks to prices either. After rallying for weeks, there has been a broader equity and commodity markets sell-off recently. That can potentially bring to focus gold’s haven status and that makes the outlook for the yellow metal constructive.

The latest Budget has disappointed gold importers as the government has not heeded their demand for a cut in customs duty on import. However, there are several provisions in the Budget designed to boost rural incomes, which, in turn, must support consumption demand for precious metals — especially the jewellery segment.

Although gold has become more expensive because of higher taxes, India’s consumption is likely to hold up in the event the income generating provisions for rural areas are well implemented.

It is also likely that any pick-up in gold demand will also rub-off on silver. The industrial metal nature of silver will likely result in it outperforming gold.

BusinessLine

Silver Phoenix Twitter                 Silver Phoenix on Facebook