Precious Metals Head for Second Monthly Gain

Slower-than-expected U.S. economic growth drags down dollar against major currencies

Gold and other precious metals are heading towards their second consecutive monthly gains after the U.S. Department of Commerce reported a slower-than-expected Q2 FY16 economic growth. This in turn dragged down the US dollar on Friday, July 29th, 2016, as reported by Reuters. Another major factor propelling gold to new heights is the weakening of the greenback against major global currencies, especially the yen, after the Bank of Japan’s stimulus fell short of market expectations.

Source: US Bureau of Economic Analysis
Source: US Bureau of Economic Analysis

Gold, silver, and other platinum group metals (PGMs) had witnessed a sharp rally in early June 2016, after the Brexit vote outcome had resulted in a shake-up of the global financial markets. Most of the demand for silver and PGMs comes from industrial users, mainly the electronics sector. While gold is considered a traditional safe haven investment in times of turmoil, the sudden spurt in prices of other precious metals partly reflects greater industrial demand.

A look at gold

Gold hit a near three-week high on Friday, July 29th, 2016, after the U.S. Department of Commerce reported that GDP grew by 1.2% in Q2 FY16, far lesser than estimates of a 2.6% growth rate. U.S. gold rose 0.6% to $1,349.00 an ounce on July 29th, 2016, after the dollar fell 1.1% against a basket of six major currencies.P2

The Fed’s decision to hike interest rates is interlinked with steady economic growth; hence, given the disappointing figures of Q2 FY16 GDP growth rates, gold rates are expected to rise higher in the near term. At its policy meeting held on July 26-27th, 2016, the Federal Reserve did not indicate an increase in interest rates later in 2016. Gold rates were being held in control over the Fed’s uncertainty over interest rate hikes ever since it rallied to more than two-year highs after the Brexit vote in June 2016.

Currency pulse – Dollar v/s Yen

P3The U.S. currency’s decline was also due to the strengthening yen, after the Bank of Japan (BOJ) failed to make a positive impact on investors by increasing monetary stimulus through only a minor increase in purchases of exchange-traded funds on Friday, July 29th, 2016. With these steps, the BOJ is trying to spur growth and accelerate inflation towards its 2% target over the next two years. By stoking the government’s massive stimulus package of over 28 trillion yen, the BOJ is looking to maximize the result of its measures on the world’s third-largest economy, which is struggling to escape decades of deflation and near economic crisis.

Platinum – rise of the metal

P4Silver was up 0.3% at $20.22 an ounce, and headed for a second monthly gain on Friday, July 29th, 2016, while Palladium rose 1.2% to $704.50 an ounce, which was its highest since October 2015. It is up 18% so far in July 2016, and on track to notch up its best monthly performance since February 2008. Platinum climbed 1.5% to $1,146.25 an ounce on Friday, July 29th, 2016, and was on track for its best month since January 2012, clocking more than 10% growth in July 2016. It hit a 14-month high on Wednesday, July 27th, 2016. While economists are unclear as to whether or not fundamental motivations have been driving the current PGM rally, it remains to be seen whether further spurts in precious metal prices can be sustained over the long term.P5

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