Gold hits weak patch as dollar regains strength

Dubai - The upcoming wedding season in India is expected to boost gold prices.

Gold has hit a weak patch as the US dollar fights to regain higher ground. The precious metal unexpectedly retreated below the psychological support level of $1,300 between March 28 and April 4. The Dollar Index charted a struggle to reach 98 before the currency gave up part of its gains amid weaker-than-expected jobs data from America and the ongoing strained anticipation over US-China trade negotiations.
Mixed signals from US economy
On the economic front, the ADP National Employment results (non-farm private sector) released on April 3 came in lower than expected amid concerns over private sector jobs growth in the US which showed the weakest gains in 18 months. Recent Non-Farm Payrolls results were better than expected, however, meaning mixed signals from the high-priority jobs market. The developments in the employment sector come on the heels of an inverted US treasury yield curve which to date has acted as an accurate warning indication of past recessions in the US, adding to worries over local economic growth in the US and overall global growth. The Federal Reserve's current downbeat stance and pause on interest rate hikes simply contribute more to investor caution and increase the odds of gold benefiting from safe-haven buying. If the US economy continues to flash warning signs of a potential recession, it will put US dollar under pressure and a shine on the yellow metal as an alternative safe-haven asset class. Typically, safe-haven buying of the non-yielding precious metal might happen when geopolitics heat up or when there is economic weakness in the world's largest economy.
4 regions face economic blows
On the geopolitical front, the financial markets face several concerns such as the ongoing US and China trade talks and the extended Brexit deadline which runs out on April 12 or may be extended until June.
In the absence of a US-China trade deal and if the UK ends up crashing out of the EU without a plan to deal with trade relations, there could be a widespread impact on the markets. Four major economic regions would be in line to take a hard economic blow.
Europe is already suffering the effects of member state slowdowns, particularly in Italy. Additional blows from a no-deal Brexit could put the region's economy on the ropes. The UK faces the prospect of simply losing access to its European markets, at least temporarily. Investor confidence and smooth market operations would face further knocks.
Both the US and China are experiencing some form of supply-chain disturbances with the ongoing trade disputes. Should the US-China trade negotiations fail to reach an agreement, gold may see more support in this scenario because investors would be seeking shelter from safe-haven assets until the dust settles. Then again, the opposite may apply if last-ditch talks reach resolutions, rescuing the global economy from more volatility and uncertainty. Already we are seeing requests for a further extension of Brexit, and sentiment is more positive regarding the US-China talks. At this stage, neither scenario can be ruled out, meaning investors ought to consider the short-term risks when taking positions.
Bulls vs bears
In the global financial market arena, the Gold bulls face off against the dollar bulls and we could be seeing the latter on the ropes if more concerning data is released from the US. While round one went to the gold bulls as the Federal Reserve paused rate hikes and undermined US dollar strength, round two went to the dollar bulls because there are still signs of strength in the US economy. Round three was a winner for gold because US jobs data shows weaknesses but it's not yet a victory for the precious metal because in any case, the jobs sector is almost at full employment.
We're still seeing the battle of the bulls at this point, with the bears getting little opportunity to drag prices down but there's a fine balance in the global economy which can't take much more of a beating without something giving.
- The writer is global head of Currency Strategy and Market Research at FXTM. Views expressed are his own and do not reflect the newspaper's policy.

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