Fed Mid-Cycle Explanation Over The Rate Cut Dragged Gold Down, And ASX-Listed Gold Miners Felt The Red Zoned Heat

Gold prices took a jab in the international market post the United States Fed reduced the interest rate by 25bps. The gold prices rallied previously over the higher rate cut expectations of 50bps.

The Federal Reserve Chair Jerome Powell finally brought down the interest rate, which was initially demanded by the United States President Donald Trump. The decision of the rate cut in the Fed meeting held on 31 July 2019 witnessed a first-rate cut post the 2008 financial crisis.

The United States President took down on the Federal Reserve previously for keeping the conditions tight and recently expressed angst over the Fed and mentioned that ‘what market wanted to hear is that this rate cut is among the first of a lengthy and rate-cutting cycle, which would keep pace with China, European Union and other countries around the world.’

The recent comment from the United States President was in response to the Fed chair Jerome Powell comments that the rate cut was just a midcycle adjustment, which in turn, slammed the doors for the market participants, forecasters, and speculators to anticipate over the possibility of the number of possible rate cuts ahead.

Jerome Powell’s statement worked against the market expectations for further cuts by mentioning the rate cut as a midcycle adjustment. Over the Fed Chair comments the United States President said on twitter that ‘as usual the Fed Chair let us down.’

Mr Trump suggested that the United States is not getting much help from the Federal Reserve.

Due to a walkout from the Fed Chair from the stance of a rate cut in future, dollar prices rallied in the international market.

Dollar Index:

The dollar index rose from level of 98.01 (Day’s low on 31 July 2019) to the high of 98.93 (on 1 August 2019), which in turn, exerted pressure on gold prices and the Spot Gold tumbled from the level of US$1,434.06 (Day’s high on 31 July 2019) to the level of US$1,400.46 (as on 1 August 2019)

The dollar index surged by over 0.92 per cent, while the gold plunged over 2 per cent from their 31 July high levels of 98.93 and US$1,434.06 respectively.

Even though the gold prices are feeling the pressure of a rise in the dollar, the investors should dig out more about the gold-related fact and figures as the drop in gold prices is over the speculation that the changes of a future rate cut are either oblique or opaque.

Gold Half-Year Trend:

The H1 demand of gold stood at 2,181.7 tonnes and recorded a three-year high level. The central banks buying and the higher inflows from the gold-backed ETFs boosted the gold demand in the first half of the year 2019.

Central Banks as a Net Buyer:

Central banks and other institutions added about 145.5 tonnes in the first quarter of the year 2019, and about 224.4 tonnes in the second quarter, which in turn, underpinned a 47 per cent Y-o-Y growth.

The overall buying from the central banks and other institutions reached the level of approx. 374.1 tonnes in the first half of the year 2019, which in turn, underpinned the growth of over 57 per cent as compared to the first half of the year 2018.

 

 Global Gold-backed ETFs Strong Start:

Other than the central banks the global gold-backed ETFs have posted a strong start in 2019, and as per the data, global gold-backed ETFs added 40.3 tonnes of gold during the first quarter of the year 2019 or US$1.9 billion with the U.S-listed and Europe-listed funds adding 26.4 tonnes and 20 tonnes respectively.

During the second quarter of the year, global gold-backed ETFs added 67.2 tonnes of gold to their respective holdings, which in turn, took the first half total holding of global gold-backed ETFs to the level of 107.5 tonnes, up by over 76.50 per cent as compared to the 2018 first-half total holdings of 60.9 tonnes.

 

Apart from that, there are many more facts and figures, which need investors’ attention, and investors should monitor and analyse the market further before entering any long or short in the gold market.

Gold on Charts:

XAU Daily Chart (Source: Thomson Reuters)

On a daily chart, the gold prices are taking the support of the upward sloping yellow trendline, which could act as the immediate support for the prices. The prices are trading above the 200 and 100-days simple moving averages. However, the 14-days RSI is showing negative divergence with the prices. The prices are moving upwards, and recently the prices breached its previous high level, but the 14-days RSI failed to do so.

The divergence on the indicator suggests that the prices could take a short-term correction before resuming the original trend. The behaviour of market participants and the future event would govern the price actions ahead. Apart from the support of upward sloping trendline, gold prices have a psychological support level of US$1400, and investors should monitor the level closely to decide on further trades in the market.

XAU Daily Chart (Source: Thomson Reuters)

Post extending the Fibonacci series through the coordinated points marked as 0,1,2 on the chart shown above the series is spreading from the level of US$1418.53 (23.6 per cent) to the level of US$1472.92 (100.0 per cent).

If the prices sustain above the low of the candle marked as 0 ( approx. US$1380), the projected Fibonacci series could act as the hurdle and possible targets for the future movements; however, the Fibonacci projected would become void if the prices breach the level of US$1380.

ASX-Listed Gold Miners:

The ASX-Listed gold miners reacted sharply over the Fed opaque stance related to the future possibility of the rate cut, which dragged the gold prices down and in turn, dragged the gold miners yesterday. However, few gold miners on ASX have built a healthy hedge book during the June 2019 quarter to avoid such volatility and investors should monitor such stocks and analyse fundamentals to reckon the price movement ahead.

For now, the gold stocks on the Australian Securities Exchange have taken a down stroll amid fall in gold prices. Gold miners such as Resolute Mining (ASX: RSG), Saracen Mineral Holdings (ASX: SAR), Northern Star Resources (ASX: NST) and many more have taken a hit.

RSG settled 5.352 per cent lower, while NST settled 7.225 per cent lower against their respective previous close on 1 August 2019.

However, despite a negative closing, the gold miners on ASX have shown slight recovery from their respective lows of the day yesterday. While RSG plunged to the level of A$1.590, the stock recovered to end the session at A$1.680, up by over 5.66 per cent from its day’s low.

Likewise, SAR plunged to the level of A$3.970, the stock ended at A$4.050, up by over 2 per cent from the day’s low. The underlying fundamentals or a profit booking activity could justify the recovery in these stocks around closing, which would require further investigation.

Gold Status Quo:

Gold prices recovered sharply around 10:00:00 UTC-4 post a tweet from the United States President over the U.S-China trade relation.

In his recent tweets, the United States President Donald Trump said that Washington would start exerting additional tariff of 10 per cent on 300 billion dollars goods import from China, which is turn, fuelled a pessimism among the market participants over the U.S-China trade relation and supported the gold prices in the international market.

Post the tweet gold recovered sharply and pulled ASX-listed gold miners along with it. Resolute Mining which previously settled 5.352 per cent down rose today on ASX to touch the level of A$1.950, up by over 16 per cent from its previous close on 2 August 2019.

Saracen Mineral and Northern Star followed the same trajectory and the stock reached over 12 per cent and 7 per cent higher from their respective previous close on 2 August 2019.


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