The appeal of the precious metals was boosted by the temporary easing of the U.S. dollar during the morning session on Wednesday. After the greenback took the yellow metal in the defensive track at the start of the week, overnight gains appeared as the market participants assess more U.S. economic data for clues on the probability of a Fed rate hike at the end of the year.
As the dollar was off 9-month highs, gold futures climbed to a three week high while the likelihood of a December rate hike stood over 70 percent. It turned out that the yellow metal brushed off the previous gains of the greenback and traders have become bullish in the path of gold. Supporting this uptrend, the market interest for gold is expected to boom in India provided that the economic growth and rising wages will sustain.
During the start of the session, gold futures ticked to a three-week high as it touched $1,276.05 per troy ounce. However, the gains were swiped off when it lost 0.11 percent to trade at $1,272.25 in the mid-session on Wednesday. The yellow metal had a session high of 1272.15 and a session low of 1269.92 as of 15:35 UTC. Gold Spot went 0.16 percent lower to 1,271.82 while silver futures declined 0.34 percent to $17.72 per troy ounce.
As the yellow metal remained exposed to high volatility, a swift uptrend is unlikely to happen. If this defensive track will continue, gold could end up at $1268.55 before the market closes. After a high volatility, it is typically followed by low volatility, which means a contraction of price. As seen in the chart, the yellow metal just came from a tight trading before the band opened wider. The mixed view over the upcoming Fed decision and US economic data will continue to affect the future path of the yellow metal.
Demand in China and India
The world’s two largest consumers of the yellow metal are highly affected by the price sensitivity of the people nowadays. As reported, the buying enthusiasm of the gold aficionados turned a tad lower due to the fact that it’s not giving a return. However, this does not indicate a short of demand, only a change of buying attitude of the consumers.
In the Indian market, the interest in the precious metal sustains as the jewelry and industrial sector seek for more gold to address the needs of the local consumers. Apparently, the uses of the yellow metal to attract wealth and blessings and to adore someone explain the 78 percent of gold made into jewelry on an annual basis.
In the Chinese market, the demand for gold is supported by the depreciating yuan. Due to decline in property prices in October, the Chinese physical gold exchange-traded funds holdings could increase further. Adding to this, the Swiss Federal Customs Administration disclosed that the shipments of gold from Switzerland to China jumped 35.5 metric tons in September – a substantial evidence of the market interest for gold.
The demand for gold in new financial products could also provide a support for the long-term interest for the metal. As Surrender Kumar Jindal, one of the largest sellers of precious metal in India, put it in his own words, “The demand for gold will continue and the products will increase by way of gold sovereign bonds, monetization schemes, coins and gold mobilization within the country. That will reduce the required physical gold, but on the other side these new buyers will increase the demand. There will be a sort of equilibrium.”
In general, the increase in the demand for the yellow metal, leads to increase in price. On the other hand, when the price goes too high, the demand will curb as the consumers’ purchasing power declines. Thus, the equilibrium between the price and demand should be sought as well.
Fed Rate Hike
Meanwhile, another contributing factor in the trend of gold is the value of the U.S. currency. As the greenback goes lower, it would provide a breather for the gold since the demand for the commodities usually increases. In line with this, the renewed expectation of a rate hike sent mixed reactions from the market players.
In a statement released recently by James Bullard, president of the Federal Reserve Bank of St. Louis, he said that "low interest rates are likely to continue to be the norm over the next two to three years.” The Fed has not yet raised interest rates in 2016, and a lot has been betting that it would imitate its December rate hike in 2015.
After years of the most accommodative Fed monetary policy, the central bank finally implemented a rate hike last December. The graph below provides the effect of the rate increase in the trend of the yellow metal. Apparently, the gold was losing ground as its resiliency was challenged and dipped as low as 1061.66. This scenario could happen again in the next two months, if a monetary adjustment will be concluded.
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