Gold may test $4,000 amid strong dollar, hawkish Fed: Mirae Asset ShareKhan
Gold price outlook: In the near term, gold can slide further. A test of support around $4000 is possible, while an extended decline to $3800 cannot be ruled out.
 "Gold may test $4,000 amid strong dollar, hawkish Fed: Mirae Asset ShareKhan")
Gold price outlook: Relief rally in gold prices on the US-Iran preliminary deal is facing the risk of reversal as the central banks turn more vigilant on curbing inflation expectations.
On June 17, spot gold, buoyed by sharply lower oil prices, rallied to $4383 -- the highest level in 8 days -- as traders positioned ahead of the US Federal Reserve's monetary policy decision. However, the FOMC, in its first meeting with Kevin Warsh as the Fed Chair, defied market expectations of an easing bias as at least nine out of 19 FOMC members see higher rates ahead. As a result, spot gold tumbled 3.74 per cent from its day's high to $4219. On June 18, spot gold traded in the range of $4214-$4338. The rally in the Asian and European sessions on lower oil prices was erased on rate hike concerns and gold traded lower for the day.
At the time of writing, the metal was trading at $4230, down .6 per cent for the day.
Geopolitics and oil:
President Donald Trump signed an agreement with Iran on Wednesday, immediately allowing Iran to sell its oil freely. Iran will remove all the military obstacles and demine the Strait of Hormuz within thirty days.
As per the agreement, Iran has agreed to temporarily reopen the Strait of Hormuz. The ceasefire is to be extended for at least another 60 days of negotiations as the US ends the US blockade and US forces pull back.
The US will temporarily lift sanctions on Iranian oil exports. Other points in the MoU include the end of hostilities in Lebanon; Iran to get access to a $300 billion reconstruction fund should a final deal be reached; and eventually lifting all the sanctions against it.
Contrary to the US's version of the agreement, Iran insists that Iran and Oman will regulate the traffic flows through the Strait. Iran will not charge ships for using the Strait for 60 days, but Iran’s top negotiator said Wednesday that there would be a fee for transit after that. Iran has reaffirmed its previous commitment to never develop a nuclear weapon, though it is an old commitment.
Questions concerning Iran’s stockpile of highly enriched uranium, further enrichment efforts, or any kind of international monitoring are to be sorted out in the extended ceasefire period. Iran will be allowed to have ballistic missiles. Risk to deal lingers as Israel has not committed to stopping its War in Lebanon.
Data roundup:
US retail sales advanced 0.9 per cent M-o-M in May, which beat the estimate of 0.6 per cent and was higher than the prior reading of 0.4 per cent. Even control group sales at 0.7 per cent M-o-M topped the median forecast of 0.4 per cent. Initial jobless claims slid from 230K to 226K (forecast 225K) as continuing claims were up from 1786K to 1810K.
Central Bank watch:
The US Federal Reserve on June 17 kept the overnight Fed fund rate unchanged at 3.5-3.75 per cent, but it was a hawkish pause as the FOMC statement removed the easing bias and many members see higher rates on the horizon. FOMC's Summary of Economic projections see at least one quarter point hike this year. Most importantly, Warsh, asserting the goal of returning to 2 per cent inflation, upheld the Fed's independence as he was not accommodative in his monetary policy stance.
Gold ETF and COMEX inventory:
Total known global gold ERF holdings fell for the eighth straight day on June 17. Holdings currently stand at 97.09 MOz, down 1.86 MOz Y-T-D. ETFs have seen a net outflow of 3.85 MOz so far since the beginning of the Iran war.
Registered COMEX gold inventory stands at 15.22 MOz, up nearly 0.08 MOz from the cycle low seen on June 9, but down 37.23 per cent from the record peak of 24.25 MOz seen in April.
US Dollar Index and yields:
The US Dollar Index has been boosted by the Fed's hawkish stance. The Index, at the time of writing, was hovering around 100.61, the highest in a year and up 0.55 per cent for the day. The Index is up 1.1 per cent from its June 17 low of 99.49.
Two-year US yields surged to 4.21 per cent -- cycle high -- on the FOMC day and June 18 before easing. At the time of writing, yields at 4.15 per cent were down 3 bps. Ten-year yields at 4.42 per cent were down 1 per cent.
Upcoming data:
Major US data on tap include S&P PMIs (June 23), PCE Price Index (June 25) and final reading of Q1 GDP (June 25). Japan's national CPI data will be released on June 19. Europe's PMIs will be released on June 23.
Outlook:
Hawkish FOMC outcome leading to a firmer Dollar and strong equities performance are negating the benefit of sharply lower oil prices. Exodus of investors from gold ETFs is negative for the yellow metal.
In the near term, gold can slide further. A test of support around $4000 is possible, while an extended decline to $3800 cannot be ruled out. It is advisable to sell into rallies with a tight stop-loss. Resistance is at $4300/$4400/$4450.
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Disclaimer: This article is written by Praveen Singh, head of commodities at Mirae Asset ShareKhan. Views expressed are his own. Readers' discretion is advised.