Dovish Fed Sets Up Noticeable Opportunity For Buyers To Return To Gold Market

Strengths

• Gold had a constructive rally in the back half of the week after the Federal Open Market Committee (FOMC) highlighted the weak inflationary pressures facing the economy and lowered its projections for interest-rate increases. Despite the Federal Reserve removing the “patient” language from its statement, investors feel we are further from a rate hike than previously anticipated.
• Gold traders are the most bullish since the week ending January 2, according to a Bloomberg survey. This shift in sentiment is primarily the result of the dovish tone from the FOMC this week.
• The U.S. dollar broke a four-week streak of positive gains this week. This pullback in the currency is a welcome sight for gold. However, the greenback remains considerably strong and is a headwind for gold.

Weaknesses

• Despite ending the week with a positive gain, platinum remains the worst performing precious metal of the year. On Tuesday, platinum prices were at the lowest level since July 2009.
• As of Monday, total holdings in gold-backed funds fell to 1,638.4 tonnes. Investors sold their holdings for each of the prior 14 days, making it the longest selling streak in over a year. Of course, as much of the selling was in anticipation of the Fed meeting, investors should feel more confident about returning to the market.
• As negotiations near, the Association of Mineworkers and Construction Union stated it will have solidified its demands by the end of March. The union, which was behind South Africa’s longest mining strike last year, emphasized its pessimism regarding the upcoming negotiations.

Opportunities

• Australia & New Zealand Banking Group Ltd. is predicting gold demand in Asia to double by 2030. The bank attributes the surge in demand to the increasing appetite of China and India for jewelry.
• Since the fall in the net-long position is nearing recent bottoms over the past year, the Fed’s dovish read on the economy has set up a noticeable opportunity for buyers to return to the market, which should send gold higher.

• China is set to allow more participants in the gold market to import the precious metal in an effort to expand the country’s gold trade. China has already taken crucial steps to liberalize its gold market as the country began offering foreigners access to RMB-denominated gold contracts in Shanghai’s free-trade zone last year.

Threats

• The Reserve Bank of India is restricting banks from selling gold that is imported on a consignment basis to jewelers on an outright basis. The move is set to deter gold imports further.
• The dollar remains elevated around its multi-year highs and further gains could depress gold and related-equity shares even further.
• Geopolitical tensions, particularly in Eastern Europe, have calmed for the time being. Consequentially, the fear premium attached to gold prices stands to ease as tensions moderate.

http://www.usfunds.com/