By Anil Mathews (ScrapMonster Author)
October 27, 2015 03:38:20 AM
MUMBAI (Scrap Monster): Gold prices are coming back to life lately with prices showing a swift recovery from sub $1100 / ounce levels to $1190/ounce levels in just couple of weeks. Well, the rally has really been impressive especially when masses were expecting lower prices in the yellow metal. What has really sowed seeds for this sudden gush and where to expect prices hereafter remains the big question mark.
The big push emerged in the prices after the unemployment data for the month of September that unveiled dark spots in the labor market conditions for consecutively second month in a row. The headline employment number not only surprised everyone on the lower side but it also came below the lower band of the expectations. Severe declines in manufacturing and mining employment restricted overall job gains. A deeper dig in the data pointed out towards some more rough patches as well. Hourly wages were only up 2.2% over the last 12 months on a yearly basis, while the labor participation rate also fell by 0.2% to 62.4%, providing indications that that the labor market is not in a real sweet spot.
Also the recent minutes of the Fed meeting were supportive for the gold. The Fed stated that it is in no hurry now to go for an interest rate hike till the times the global uncertainty settles down. Understandably, gold bulls cheered up as a rate hike is typically associated negatively for assets like gold which offer no guaranteed returns to their holders. The comments from the International Monetary Fund which slashed its global economic growth forecast for the second time in 2015, citing towards weakness in China and soft commodity prices also came in what could have been no better time for the hungry bulls. The IMF estimated that the world's economy will grow at 3.1% this year and 3.6% in 2016. Both estimates are 0.2% below the IMF's July forecasts which in turn led investors towards the safe haven gold.
But ironically not everything has turned positive for gold yet. The yellow metal is just witnessing a normal upside correction within a bear trend, which needs to be differentiated from a bull market rally. Physical demand is not picking up despite the low prices, world demand has slumped to a six year lows in the second quarter of the year and more importantly the drawbacks are seen in all the major consumption segments. Chinese Central bank has stated recently that they are deliberately not piling on the metal given its limitations as a reserve asset, high volatility, high cost of holding and relatively small market compared to bonds. This statement pares well with the low gold reserves (1650MT) which were disclosed in the month of June after a stretch of six years. Also the latest imports by India, the second largest consumer dropped 52 percent for the month of September. Overseas purchases tumbled to 67 metric tons from 141 tons in August that leaves a big question mark regarding the sustainability of this pullback.
Prices are trading well above the cost of production of the senior and mid tier miners which leaves ample room for them to come lower. The expectations of a delay in the first rate hike has brought some relief to an over stressed market but the deal is still on the table. With a 40 % probability of a rate hike coming this year, the odds remain still high for a hike, especially when the Fed chairperson has expressed her willingness more than once to pull the plug .The above expectations Core CPI numbers and the initial jobless claims have once again started to bring the discussion of the rate hike, back on the table.
Technically the rally is likely to enter into the trouble zone very soon. A lot of supply is expected to be released around $1200/ounce mark that can curb any further rally. Also in domestic markets the strength in the Rupee has kept the prices relatively lower over last few weeks , showing a complete reverse phenomenon from the months of July and August when the domestic prices were leading higher on than back of weakness in domestic currency. The long term charts and the internal Fibonacci ratios point are still not confirming the trend reversal in the gold as yet and warning the glitters in gold to wane in the coming months!