Risk-On Mode Still Hurting Gold

November 16th, 2016 by

The precious metals were trending modestly lower on Wednesday morning as investors and traders continue to bask in the risk-on feelings that have followed the presidential election. In addition to this shift toward riskier assets, precious metal prices are continuing to be weighed down by a stronger dollar and state-sponsored suppression of gold demand in India.

Gold prices were just barely above unchanged, trading about 80¢ per ounce higher at $1,230/oz. Spot silver fell by 10 am EST, giving up 10¢ per ounce (-0.6%) to settle right around $17/oz.

Palladium prices stood out as the only winner among the precious metals, adding over 1% to trade $10 per ounce higher.

Dollar, Inflation

Despite various signs that inflation may soon be on the rise, the markets were disappointed by Wednesday morning’s report of wholesale prices in the U.S. for October. The Producer Price Index (PPI) came in below expectations after a 0.3% gain in September. While healthcare costs rose, the Labor Department’s inflation measure was held down by a sharp drop in food prices. However, PPI was still 0.8% higher year-on-year.

dollar-rally-inflation

PPI is just one of three measures of prices tracked by the Labor Department. The government’s gauge of import prices showed a surge yesterday while the markets await tomorrow’s release of the Consumer Price Index (CPI), considered by many to be the most reliable measure of inflation.

Higher inflation is generally seen as a positive development for gold prices. Yet this development has coincided with a sharply stronger U.S. dollar, which generally moves inversely to gold. The DXY dollar spot index touched above 100.4 during early trading on Wednesday, its strongest since 2003. In fact, the greenback has only poked above 100 on the DXY (which measures the strength of the dollar relative to a basket of major world currencies) on two brief occasions over that thirteen-year period.

India’s Influence

Besides the impact of a firmer dollar, the gold market is also being weighed down by events in one of the world’s top gold-buying countries, India. Along with China, India is consistently one off the top two nations in terms of gold demand on an annual basis.

Indians’ affinity for gold is tied to several factors: 1) an ingrained cultural practice of using gold jewelry as a reliable store of wealth; 2) the widespread tradition of giving gold as a gift at Indian weddings; and 3) the wider public’s general distrust of banking, especially in rural areas.

The government of Prime Minister Narendra Modi has repeatedly taken steps to curb gold demand in India, however. This is because the massive influx of gold into the country significantly adds to the national trade deficit. In addition to encouraging citizens to deposit their gold with financial institutions through Gold Monetization Schemes (GMS), the Modi administration made a surprise announcement last week that the two largest-denomination banknotes (500 rupees and 1,000 rupees) would be demonetized. This has caused a cash shortage that has in turn led to a sharp reduction in gold purchases.

The currency crunch should be resolved in India by the beginning of 2017, but is placing downward pressure on gold prices in the meantime.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.