Dollar strengthens but sentiments for gold are positive

Gold started the week on its back foot, testing the $1,300 level mid week. The metal recovered sharply ending the week essentially unchanged. A key catalyst for the recovery in the USD gold price was the revelation that that Presidents Trump and Xi will not meet to resolve trade differences prior to the imposition of increased tariffs in March. U.S. President Donald Trump said last week that he had no plans to meet with Chinese President Xi Jinping before a March 1deadline to achieve a trade deal.

We continue to see the US China trade conflict, Fed and ECB actions as key drivers of equity and USD volatility, in turn driving investors to safe haven gold.

Concerns regarding the Chinese economy, weak growth and political tension in the Euro zone, Brexit and lingering global trade tensions are weighing in on market sentiment and the dollar is once more sought after as a refuge asset.

Investors strongly believe that there is much scope for gold to rise and they cite 3 main reasons for that-

  • Geopolitical Risk.The U.S. trade war with China, the humanitarian crisis in Venezuela, and Britain’s planned Brexit from the European Union are three examples of this. Each raises uncertainty for investors about the future, and that tends to make them anxious. Investors are also worried about the economic impact of U.S. government shutdown when global growth is already lean.
  • High Stock Valuations.Investors are also increasingly wary of the stock market that’s pricey relative to projected earnings. So, some investors are cashing in at least part of their stock holdings and sending some of the proceeds to gold funds. With stocks now showing signs of rolling over in response to trade talks concerns and a weaker growth forecast, gold should find enough support once again to prevent a serious challenge at support, currently at $1,300 an ounce, followed by $1,275
  • Dollar– Gold is being pushed around by the U.S. dollar in the near term. Traders are getting out of anything to do with Europe on concerns of weakness in the region and going for safe-haven buying into U.S. treasuries, which is pushing up the dollar. But a possible shut down and impact of the US economy on its global counterpart, might make the dollar weak thus pushing gold further.
  • The Federal Reserve.  The Fed also seems to be at “an inflection point” when it comes to U.S. interest rates. He notes that the investment community went from expecting the Fed to boost rates multiple times this year to now perhaps making no increases in 2019. Lower interest rates tend to weaken the U.S. dollar and boost inflation risks, making gold more attractive. Gold and dollar are inversely related so whenever there is any negative effect on the dollar, gold prices tend to rise.

For gold, a lot of the recent action is largely dictated by the fact that the dollar is holding firm over the past two weeks. That has seen gold fall from resistance around $1,326 to current levels. But as long as the figure level still isn’t breached, there’s still favourable momentum to for gold to continue its upside run since November last year. We remain of the view that the $1,350 level is viable in the coming months, and note the $1,360 technical resistance level many market participants are watching.

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