Gold Prices: Investors Nervous Regarding Federal Reserve and U.S. Dollar
After hitting their lowest levels since early 2010 a day earlier, gold prices are finding support in early trading on Thursday, November 19.
One of the reasons investors sold the precious metal is that on November 18, the Federal Open Market Committee (FOMC) meeting minutes were released. With the meeting minutes, the Federal Reserve provided insight into what it plans to do in the upcoming months. While there was no definitive information provided, the Federal Reserve said, “Members, however, expressed a range of views regarding the extent of further progress in labor market indicators they would need to see to judge it appropriate to raise the target range for the federal funds rate in December.” (Source: “Minutes of the Federal Open Market Committee,” Federal Reserve, November 18, 2015.)
However, the rhetoric seems to be leaning toward raising interest rates and beginning the normalization process. It is believed that a rise in interest rates will not be good for gold prices.
Another factor that added to the selling in gold is the rising dollar. After the meeting minutes from the Federal Reserve were released, the U.S. dollar gained strength, adding to the greenback’s recent continuous upward move. Between the first trading day of November and November 18, the U.S. dollar index, which tracks the value of the U.S. dollar compared to major global currencies, has risen by more than three percent. Remember: the U.S. dollar and gold have an inverse relationship, so when the dollar goes up, gold tends to go down.
Any Reason to Be Bullish on Gold Prices?
Recently, the Indian government introduced a scheme to curb the demand for gold bullion in its country. India has been a major importer of gold, but with this scheme, investors give their gold to the banks and earn interest. This is expected to have a big impact on demand for the precious metal. Currently, India is hoarding about 20,000 tonnes of gold.
To provide a little more perspective on the matter, consider the following: in August, India, the biggest consumer of gold, imported $4.95 billion worth of the precious metal. This was 140% higher than the same period a year ago. (Source: “Quick Estimates For Selected Major Commodities For August, 2015,” India’s Ministry of Commerce & Industry, last accessed November 19, 2015.)
Anil Sankhal, the northern regional chairman of India’s Gem and Jewellery Export Promotion Council, said, “Only 400 grammes have been deposited so far,” adding, “The government has agreed to review the scheme and open more centres for gold testing and depositing in banks.” (Source: “Modi’s gold deposit scheme attracts only 400 grammes so far,” Reuters, November 19, 2015.)
As for China, there have been some developments there that could positively influence gold prices. The central bank of the second-biggest gold consumer lowered its key lending rate to below the standing lending facility (SLF), a tool that the central bank uses to inject capital into the banking system. The People’s Bank of China said that the overnight rate would be cut to 2.75% and the seven-day rate to 3.25%. (Source: “China central bank cuts borrowing costs, eyes market-based rates,” Reuters, November 19, 2015.) These cuts could give a moderate boost to gold prices, similar to what happened when the bank last lowered its rates in October.