Hitesh Jain
IIFL
Gold has been synonymous with safe haven investment for a very large part of human history, however, currently we are going through a phase when the yellow metal is finding few takers.
In the run up to US Federal Reserve rate decision this week, gold seems to be the biggest causality, among a series of assets affected by a rate hike scenario. Precious metals in general have bore the brunt of aggressive selling in the last few days. Gold unlike most metals is treated differently, but not this time. The yellow metal is already at a five-year low, dangerously flirting with the US$1,000/oz mark. Most likely gold will end the year under the US$1000/oz mark extending its third annual year of loss for the asset.
It is no secret that the US Fed rate hike is imminent. In her latest comments, Fed Chief Janet Yellen indicated that a December rate hike is likely. Yellen has elaborated that if Fed procrastinates the process of policy normalization then the central bank will be compelled to tighten monetary policy relatively rapidly in order to avert certain economic parameters from substantially exceeding the prescribed limits.
In case of abrupt tightening, there is a big risk of throwing the economy in to recessionary conditions and in the process harming the financial markets. She further added that maintain status quo on the interest rates will encourage excessive risk-taking and thus undermine financial stability. Nevertheless, Yellen simultaneously pacified investors by stating that the process of hike in interest rates will be gradual.
At the current juncture, precious metals have derived some respite from the retracement in the greenback against the basket of currencies, particularly the Euro. Euro has skyrocketed to 109 levels against US dollar, responding to the European Central Bank's latest policy easing measures. ECB has cut its deposit facility rate to -0.3% from -0.2% and extended the monthly bond buying programme till March 2017. Market participants were surprised as the central bank did not increase the quantum of government bonds it buys each month.
There was an expectation that the central bank will do more in order to avert the Euro region from the pangs of deflation. However, ECB is of the opinion that extension of QE and the re-investment of principal will suffice.
Volatility will increase on December 16 Fed policy meeting and is likely to continue for the next few months. Although 25 basis points hike is a done deal, there are still concerns of Fed getting aggressive if the economy shows signs of successfully absorbing the first rate hike. The real trouble is that nobody knows what exactly gradual policy normalization implies and how may rate hikes will it entail.
Looking forward, US dollar is expected to gain further momentum as divergent scenario seems to be emerging, wherein Fed is turning out to be a bit hawkish, while ECB is contemplating at a prolonged accommodative stance. This entails flight of capital to a safer and high yielding currency like greenback. Effectively, the entire commodity pack will remain under pressure, influenced by currency induced movements. On a longer term perspective, the fortunes of the yellow metal hinges on whether Fed adopts a long pause after the first move on the rates.
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