PRICE PERFORMANCE AND REVIEW
- As the gold prices recovered from 5-1/2 month lows in the month December 2016, prices gained nearly10 % in the first quarter of 2017. A broader consolidation overshadowed the gains in the second quarter, despite which the yellow metal managed to post a return of 8 % in the first half of 2017.
- After taking it from sub $1200/ounce mark this year, spot gold stood tall twice towards $ 1300/ounce, however, each time the prevailing supply tossed the prices lower.
- In the domestic markets, gold prices made a high of Rs. 29785/10 gms in February, rallying from Rs. 27445/10 gms seen on 31st of December 2016. After the initial gains the performance has been dismal, owing to a host of factors , including the appreciation in Rupee.
- The yellow metal shrugged off the 25 bps rate hike by the Fed in the month of March, as the investors looked complacent that despite an increase in the rates , the real yield would remain low on account of pick up in the inflation, also the geo political tensions around North Korea and US supported some safe haven demand. However, the second rate hike that came in the month of June hurt the bullish sentiments and prices retreated sharply lower towards $ 1200/ounce.
- The Fed sounded more hawkish in June and signaled to go ahead with two more rate hikes in this year along with start of selling the bonds, in order to trim its massive balance sheet. At the same time, the recovery in the 10 Year Treasury yields on expectations higher rates and increased spending on infrastructure post President-elect Donald Trump victory, further took some sheen off gold.
- World’s second largest consumer of gold-India, re-monetised 85% of the value of currency i.e, Rs.15.44 trillion by the end of March 2017 to counter the effect of de-monetisation happened in November 2016. It led to a pick up in the physical demand of gold. In the second quarter also the physical demand was robust in India ahead of the GST implementation from July 1. Investment , ETF and official demand also improved in comparison to the same period last year , however, any kind of fireworks went missing completely.
US LABOR MARKET AND INFLATION CONDITIONS
The rate of inflation in US has been a cause of concern as it has been constantly basking near 1.5 % below than the Fed’s target of 2%. Fed has reiterated that it will watch the inflation closely along with the recovery in the labor market before further increasing the interest rates.
The health of labor market has remained stable broadly in the first half of 2017, with unemployment report comfortably below 5% for consecutive six quarters now, the number of non farm job addition has also been strong.
ELECTIONS – EUROPE
- Akin to the uncertainties ahead of Brexit and US Presidential elections in 2016, new buying interest was seen in the safe haven in the first quarter specially by Euro zone investors, ahead of elections UK, France and the Netherlands.
- The investors were having a keen interest on Dutch's general election result in the month of March. Markets kept calm post the results as the anti-islamic & undemocratic statements of Geert Wilder, who was willing to have a referendum & about to leave the EU came second in the election's result. Once again Peoples Party of Freedom (PVV) retained their position as largest party with the Prime Minister candidate Mark Rutte.
- Speculations were high ahead of the elections in France, where a neck to neck contest was seen between the centrist Emmanuel Macron and far-right leader Marine Le Pen. Gold prices dragged sharply after the French election results, which saw centrist Emmanuel Macron winning the elections. Although the impact of UK’s election remained domestic, still the uncertainties lifted the sentiments in safe haven assets like gold , ahead of the event.
- The upcoming elections in Germany in the month of September would also be closely watched
- There were no particular fireworks seen in terms of demand during the first half of the year, however, there were still some pockets where improvement was seen. Physical demand was up 17% in the first half of the year compared to the last year.
- Jewellery demand increased by 18% to 534 MTs in Q1’17 compared to 449 MTs in Q1’16, followed by another strong second quarter where the jewellery demand was seen at 541 MTs against 436 MTs seen in the Q2 2016.
- Retail investment demand recorded an increase of 3.5% in the first half, thanks to the increase of 8.5% in Q1 y-o-y where it totaled to 266 MTs. The second quarter witnessed a decline of 2%. U.S. Mint reported approximately half the amount of coin sales during the first half of this year compared to the same period in 2016
- Central banks buying was continued during the said period, despite China being absent this year after strong purchases in the last year , the sector recorded a stellar rise of 195 % in the second quarter .
- After an increased pressure towards outflows, the ETF’s witnessed buying from institutional investors, suggesting the confidence in the gold. Although the pace of inflows remained paltry compared to last year. Demand for US-based ETFs fluctuated throughout the quarter: inflows in April and June were partly offset by small mid-quarter outflows, however, European investors took the centre stage capturing nearly 76 % of net inflows.
- As per GFMS report , fabrication demand decreased by only 6.2% year-on-year during the first half of 2017, after a sharp decline of 19% noted in the same period last year. The trend continues to show the shift in the Chinese demand from 24K gold to 22 K and new design Jewellery.
- In lines with the falling global demand for coins worldwide, demand for gold coins in China also took a toll and fell 63%, 20% in the first two respective quarters.
- Total imports from Hong Kong and Switzerland, which usually remain over 85% of total imports, totaled at 443 tonnes in the first five months this year, just ten tonnes less than the volume recorded in the equivalent period of 2016.
- Chinese central bank did not increase its holdings for the first time in last seven months as there was no movement in Chinese FX reserves. China’s gold reserves remained 2.4%, as the gold price rose during Q1’17
- India rolled out Goods and Services Tax or GST. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Tax rate on Gold and Jewellery has been kept at 3% from an earlier tax rate of 1.2%. Jewellery fabrication in Q2, 2017 increased to the highest level in six quarters and gained 143% from the same period last year. The high level of demand was seen ahead of the implementation of India's GST due to seasonal purchases being brought forward prior to the tax increases, however, after GST some pressure can be seen on short term demand in India. Estimates suggest that Akshaya Tritiya-related sales were up by around 30% y-o-y.
- As per WGC, GST will lead to underwhelming levels of demand during the traditionally busy months between September and November. The agency also stated that it could increase illegal importation and trading of Gold would become a more appealing proposition.
- Industry Experts believe that GST would spark efficiency and transparency gains, incentivizing more integrated and organized participants.
- Global ETF’s witnessed strong inflows in the first half of the year. The holdings were up by 167.9 MTs, suggesting an interest of institutional traders and hedge funds.
- European ETF’s witnessed the largest inflows growing from 570.2 MT in 2015 end to 977.7 MT at the end of Q2 17.
- Demand for US-based ETFs fluctuated throughout the quarter: inflows in April and June were partly offset by small mid-quarter outflows.
- Chinese ETF showed outflows after gaining manifold in 2016, pointing towards a speculative behavior of ETF demand in the country.
- During the second quarter, the central bank demand jumped by 20 per cent to 94 MTs against 78 MTs in the Q2 of 2016. In the first half of 2017, central bank purchases were down by 3 per cent at 177 MTS.
- Top active central bank buyers were Russia & Kazakhstan.
- Argentina entered swap agreements with gold totaling 6.9 MTS to enhance the yield on their gold holdings.
- In April, Reuters stated that Turkish Central bank can be given first option to buy locally mined gold.
- According to the WGC report, total supply fell by 8 per cent to 1,066 MTs in the April-June quarter as compared to 1,160.3 MTS in the same period last year. This was largely led by a steep drop in recycling, which declined by 18 per cent to 280 MTs. Mine production remained virtually flat, falling marginally by 3 tonnes to 791 MTs.
- The production is falling since some last quarters, as the existing reserves are depleted and the current project pipeline will be unable to replace them fully.
- Resurgence in recycling of gold can be seen upon the positive implementation of GST in India, the second largest consumer of the gold.
- Commitment of trade report by CFTC shows the Net long position of large speculator increased sharply during the first quarter of 2017, showing the extreme positive sentiments among the large traders and speculators. The subsequent price action post April was against the perception by the large players.
- The non commercial futures contract traded in Comex gold futures, traded by large speculators & hedge funds totaled a net position of 137820 contracts till 28 March 2017, which was 41270 contracts more compared to last quarter of 2016. A similar trend has been seen in the Q2 17 .
- A sharp decline in the net long positions was seen in the month of June and July after the prices slipped from this year high. Given the overall positive sentiments seen in the COT report , the price trend is likely to remain up in the upcoming weeks
Physical Demand: The physical demand is expected to pick up in the current quarter on account of festive demand in India, although the recent surge in the gold prices and the stock hoarding in the second quarter ahead of the GST implementation can keep the demand lower compared to the seasonal average. Buying from Central banks have been relatively muted in this year, which is expected to be seen for the rest of the year.
Supply: The declining trend of global supply is likely to continue in the absence of any new mine supply. The stagnant prices are also likely to balance the recycled gold supply, which has shown an increase in recent quarters.
US Monetary Policy: After two interest rate hikes in this year so far, the Fed is keeping the pace with its targeted rate hike projections. Having said , the staggering inflation is one of the biggest challenge before Fed that can derail the future rate hikes, which would be supportive for gold. Also one more rate hike seems discounted in the prices already. In the latest policy meet, Fed has indicated that it is looking to trim its balance sheet size by selling the bonds, that would bring down the liquidity from the system and can keep a check on gold prices.
Dollar Index and Currency Movement: The dollar index fell to 2 year lows against Euro, after the ECB signalled to start increasing the rates, because of the better than expected pace of recovery in the economy. An extended decline in the dollar in the upcoming quarters would also support gold prices.
Global Equity markets : The strong performance by global equities and the increase in the bond yields were two major factors which have kept the investors away from gold , which is considered a risk averse asset. A meaningful correction in those markets is likely to spark buying interest in gold, given it is still trading at substantially lower levels from all time highs.
CFTC Positions: The commitment of traders report by Commodity Futures Trading commission shows that hedge funds and large money managers have maintained the optimism in the gold market. The net longs, however, have receded from ultra high levels, which leaves room for fresh buying interest in gold
Institutional/ETF holdings: There has been a positive trend noticed in the gold exchange traded funds in this year. There has been a tendency seen in the ETF inflows to close follow the price action, which means there can be a stronger inflow in case the prices start to move southwards from current levels.
Policy implementation in US : Gold can take cues from the policy implementation in US by Trump administration. Already there has been much delay in the fiscal stimulus and approval of tax reforms, that has started to question the ability of the new government. Further a raise in the debt ceiling for spending would increase the burden on the exchequer and trigger a weakness in risk sentiments.
Geo Political Tensions- Last but not the least, the escalating geo political tensions around North Korea- US , India- China has kept gold’s prices supported , any further deterioration in the conditions would definitely boost the safe haven buying in gold .
- COMEX Gold prices are currently unfolding in the “c” wave within a corrective a-b-c formation. The formation is likely to complete a “B” wave correction of one larger degree that started in the Month of December 2016.
- The ongoing “c” wave has already completed first two waves of the total 5 wave advance and is likely to travel further towards $ 1380/ounce in the base case scenario and towards $ 1440-$1480/ in case of an extended c wave. We expect prices to start moving higher as they have tested the strong support of $ 1265-1260/ounce in its 2nd wave of correction.
- On MCX gold prices were seen unfolding a flat correction in the last quarter within “B” wave correction, we believe that prices have ended the “ B” wave correction at Rs 27600/10 Gms in the month of July and have started to move higher in its 5 wave advance within the “C” wave, which is likely to take the prices higher towards Rs 31500/10 Gms
Buy at $1260-1265 TP $1380//$1420 Stop Loss $ 1190 Buy at 28650-28750 TP 31500/32500 Stop loss 27600
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