MARKET
After spending most of 2015 in distress, gold futures finally made a recovery ever since the start of 2016 on the back of tumultuous opening of the global equity markets.
In a period of disappointment across the financial globe, where crude oil was aggressively falling, and majority of the stock indices entering bear market amid fears of slowdown in Chinese and global economy, gold was the winner. On the other hand, 2015 kept gold traders worried as to when the US will raise its interest rates after a nine-year period of low interest rates. And finally, the US raised its interest rates on December 16, 2015! But that acted as “buy the fact and sell the rumour” for gold as it was done with the period of continuous depression and finally got released.
It was not just the fundamentals that supported gold futures in 2016 but also the technical picture was improving as the commodity started to form a rounding bottom on the daily chart.
Panic was the major theme in the start of 2016 that helped the precious commodity to get benefited on the back of its safety haven demand. Global stocks fell at the start of 2016 on the back of the fear of Chinese slowdown, Chinese devaluation of currency, global economic downturn, US interest rate hike and crash in oil prices. As stocks fell, gold prices went up.
The element got good news on January 29, 2016 as Bank of Japan surprisingly came forward to cut interest rates into negative territory in order to stimulate the Japanese economic growth and low inflation. Gold typically enjoys negative interest rate environment as it is a non-yielding investment and negative interest rates helps it to become more attractive to the investors. Negative interest rates tend to water the gold investments thus drying up the currency market.
Whether it is the Federal Reserve Bank of America, Bank of England, European Central Banks and Bank of Japan, all the major central banks acknowledged the agony of the financial markets, including stocks and commodities. Fed, BOE and ECB turned dovish in their January policy meetings in order to calm the falling stock markets.
Another positive factor for the technical traders was the breach of three year long descending trend line resistance that created a lot of positive sentiments in the gold market, especially for the technicians.
Gold remained contained in a descending trend line since September 2013 that was breached in February 2016.
Just after the technical traders were enjoying the fact that the precious metal broke a major resistance, there came good news that it made a golden cross on the daily chart that is considered to be a bullish indication on technical grounds. Golden cross is referred to as 50 DMA crossing the 200 DMA from below.
Even though gold was rising but there was still a fear hanging on prices that US may raise rates this year by four times that kept buyers in check, but on March 16, 2016 gold buyers finally got relieved as the Fed downgraded its interest rate projections in 2016 from four times to two times and slashed GDP forecasts from 2.4 percent to 2.2 percent. This created another round of buying in gold futures as investors became must confident that US was worried about the global growth.
After unambiguously dovish Federal Reserve Bank of America that slashed its economic and interest rate forecasts, Fed officials sounded hawkish as they suggested sooner interest rate hike helping dollar to strengthen, that created some consolidation and profit taking in gold for two weeks in late March and early April 2016.
In April, investors were convinced once again that US will not raise interest rates soon and stock market once again entered into a period of consolidation and sell off after ECB and BOJ failed to live up to investors expectation and thus held the monetary policy unchanged. The lower range consolidation in stock market also acted as a catalyst for gold prices to take another high.
In the month of May, gold traded lower on the back of positive economic reports out of US and hawkish Fed minutes. Moreover, Fed officials including Janet Yellen adopted a hawkish tone suggesting that the market is under pricing the rate hikes in 2016 that helped to strengthen the dollar and thus created selling in gold futures.
June was a month of uncertainty for the global economy that impacted gold prices both ways but finally ended up as an enjoyment for gold bulls. In the early days of June, polls were favouring British exit out of the European Union as UK Referendum was due on June 23, 2016. Gold was benefited as the polls suggested Brexit and created panic among the stock market investors. All the major central banks preferred to stay on the sidelines ahead of the UK referendum. On June 16, 2016, Jo Cox who was a Labour party member and pro British remain in the European Union was killed due to her favour for Bremain and thus a lot of sympathy went to the remain campaign, creating a lead in the polls for British remain in the EU and creating buying in riskier assets, setting off gold.
And finally the Day of Judgment came with an unexpected result – Brexit. UK voted to exit the EU that created panic among the investors and gold took advantage of the panic soaring to 1358.
Gold futures rallied to settle at a fresh two-year high on July 7, 2016 benefiting from a rush to safety sparked by uncertainty surrounding the UK vote to leave the European Union. Sterling plummeted to 31-year low as renewed fears over the impact of Britain's exit from the European Union pushed investors toward safe havens.
Just after posting its two year high, gold is now consolidating before taking another leg higher. The catalyst behind gold’s profit taking is the recent dramatic recovery in stock markets. US stocks are trading at all time high that has allowed gold to take a breather. Stock market is getting boost on the back of low interest rate environment across the globe.
Gold market is predominately in an uptrend and the story of gold in 2016 has a lot of happy moments which may continue as the world is moving towards easing supporting the Gold Futures.
The writer is a financial analyst
