BENGALURU – Gold prices rose for a second straight day on Thursday as risk averse sentiment amid weaker oil prices drove up the demand for the metal, with a softer dollar and weakness in US Treasury yields also lending support.
Spot gold rose 0.5% to $1 252.41/oz at 0812 GMT. It rose 0.3% in the previous session, its largest intraday percentage change since June 6.
US gold futures for August delivery rose 0.6% to $1 253.30/oz.
“A softer US dollar and a risk-off bias following the recent declines to crude saw gold turn higher during Asian hours on Thursday,” MKS PAMP trader Sam Laughlin said in a note.
Oil turned lower on Thursday after posting gains earlier in the session as traders look ready to test new lows for crude prices with worries persisting over a global glut. [O/R]
“The uncontrolled oil price spill in the futures markets may have seen some traders pushing the risk aversion button and buying gold,” said Jeffrey Halley, senior market analyst at Oanda.
“The primary driver appears to be the flattening of the longer-dated US Treasury curve.”
The US Treasury yield curve flattened to almost ten-year lows on Wednesday as investors evaluated the impact of hawkish Federal Reserve policy on the economy even as inflation measures are deteriorating.
US home resales unexpectedly rose in May to the third highest monthly level in a decade and a chronic inventory shortage pushed the median home price to an all-time high.
Gold is highly sensitive to rising rates and yields, which increase the opportunity cost of holding nonyielding assets such as bullion while boosting the dollar, in which it is priced.
“Investors are waiting for any clues on whether the timing of the next rate hike is September or December,” said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.
Spot gold may bounce more into a range of $1 257 to $1 261/oz, as it has cleared a resistance at $1 251 according to Reuters technical analyst Wang Tao.
The US dollar index, which measures the greenback against a basket of six currencies, retreated from a one-month high of 97.871 set on Tuesday.
Holdings in SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.04% to 853.98 tonnes on Wednesday.
Among other precious metals, silver gained 1% to $16.61/oz. Platinum touched its highest in a week during the session and was up 0.6% to $929.20/oz, while palladium slipped 0.8% to $880.99/oz.
Johannesburg – A severe drought in southern Africa has triggered a surge in food prices, preventing central banks from loosening monetary policy to spur economic growth.
Central banks in South Africa, Zambia and Mozambique have been forced to raise interest rates to rein in inflation after the El Nino-induced drought crippled the production of the staple maize and other crops, pushing up food prices, despite dismal economic growth prospects.
South Africa’s central bank forecasts Africa’s most industrialised economy to grow by 0.6 percent this year, after expanding 1.3 percent in 2015, partly hobbled by the drought and low commodity prices.
The bank has hiked rates by a cumulative 200 basis points since January 2014 to bring inflation within its target band of between 3 and 6 percent.
Sanlam economic advisor Jac Laubscher said by leaving the benchmark rate at 7 percent at its policy meeting last month, the bank was trying to strike a balance between fighting inflation and not depressing already weak economic growth.
“This time around they opted for growth, while at the same time making it clear that the decision to keep the repo rate unchanged should be viewed as a mere pause,” Laubscher said.
Inflation stood at 6.2 percent in April, but food inflation rose to 11.3 percent compared with 5 percent in the same period last year. The central bank sees food inflation peaking at 12 percent in the final quarter of 2016.
“This tightened monetary policy stance unfortunately comes at a time of very lacklustre economic growth,” said Hanns Spangenberg, an economist at NKC African Economics. “However, the central bank cannot let expectations for inflation anchor at levels above the upper range of its target range.”
Also of concern was a weaker rand, which has depreciated 26 percent to the dollar since January 2015. The currency is vulnerable to possible downgrades to South Africa’s credit rating and higher US interest rates.
In Zambia, Africa’s no.2 copper producer, the benchmark lending rate is at a record 15.5 percent as the central bank fights higher inflation, which stood at 21.3 percent in May compared with 6.9 percent in May 2015.
“The cost of maize has gone up significantly and that is fuelling inflation,” Zambia’s Deputy Finance Minister Christopher Mvunga said. “Unless we are food sufficient, central banks will struggle.”
Zambia’s central bank expects inflation to average 8.7 percent in the fourth quarter of 2016, but analysts say the target was too ambitious.
“It is very difficult to attain single digit inflation because our currency has been depreciating and most of the goods that we consume are imported,” said Lubinda Habazoka, an economist at the Copperbelt University.
Weaker copper prices have put pressure on Zambia’s currency and the economy. The government expects the economy to grow by 3.7 percent this year against 3.5 percent last year.
Higher food prices have also pushed up annual inflation in Mozambique, which faces an imminent sovereign debt default.
Inflation stood at 17.29 percent in April after prices rose by 1.98 percent in April 2015.
The central bank lifted its benchmark lending rate by 200 basis points to 12.75 percent in April, saying it was concerned about pronounced inflation risks caused by the drought and the sharp depreciation of the currency.
Johannesburg – South Africa should brace itself for a rapid rise in staple food prices as the worst drought in 23 years leaves farm land barren.
Although food inflation in the country has remained relatively low, the drought and the weak rand could change the equation as the country has to rely on imports to augment the shortage in the local market.
The latest statistics show maize, wheat, soya beans, sunflower and ground nut harvests have fallen by almost 30 percent year on year.
In the meantime, sugar cane production came down by almost 23 percent. In some sugar cane areas of KwaZulu-Natal, production fell by as much as 53 percent.
Agricultural experts this week warned that the people who would feel the biggest impact of the drought would be the poorest of the poor, who depend on staple foods such as maize, bread, cereal and beans.
Farmer representative body Grain SA this week warned of tough times ahead for consumers as living costs would rise and disposable income drop.
Grain SA economist Wandile Sihlobo said poor people would have to dig deeper into their disposable income to buy maize, which at the current exchange rate cost almost double the normal price.
“The cost of importing maize has increased by at least 80 percent in the past days alone,” Sihlobo said.
“The drought has had quite a significant impact that it has caused but what I think what is closer to our tables is maize where the harvest has actually decreased by 31 percent on a year-on-year basis so the impact is quite significant.”
During a good harvest, South Africa is able to provide enough maize for its own consumption, netting the agricultural industry at least R6.5 billion in revenue.
But this week, with the rand dipping to R14, its weakest level yet against the dollar, Grain SA forecast that South Africa would import 700 000 tons of yellow maize and 50 000 tons of white maize in the coming maize marketing year.
The provinces hardest hit by the drought are KwaZulu-Natal, North West, Free State and Mpumalanga.
In KwaZulu-Natal, the sugar cane industry warned that it would take at least 10 years to recover the billions of rands it has lost through the drought.
South African Cane Growers Association managing director Nhlanhla Gumede said the industry faced a “double whammy” because farmers made a return on their investments over a time period of eight to 10 years and a break in the cycle could push them into further despair.
“If the good conditions prevail then the crop will be able to recover relatively quickly – not enough for this year but certainly for next year,” Gumede said.
“Our focus at present is to work with as many stakeholders as possible to provide a basket of solutions for farmers and workers.”
Agri SA agricultural economist Thabi Nkosi said farmers were scaling back on production, which could leave millions without jobs as the industry was labour intensive.
Nkosi said the drought could cost farmers R10bn as input costs surpassed profits, raising worries about the short-term sustainability of the industry.
“Farmers are holding back and do not want to invest in an industry that is looking bleak,” Nkosi said.
“Some of them are already talking insolvency so they will not be looking at employing more people instead they would retrench those already in employment to lower their costs,” Nkosi added.
South Africa’s index of gold-mining stocks fell to the lowest since February 2001 as the precious metal slid and local producers battled rising costs.
The five-member FTSE/JSE Africa Gold Mining Index dropped 9.5 percent to 846.93 by the close of trading in Johannesburg. Sibanye Gold Ltd. led the decline, losing 11 percent to 17.50 rand, the lowest since February 2014. Gold reached a five-year low in London.
The metal sank as much as 4.2 percent as the Federal Reserve gets closer to raising U.S. rates for the first time since 2006, strengthening the dollar and reducing demand for haven assets such as gold. Mining companies in South Africa are struggling with lower output from aging ore bodies and labor costs that have more than doubled since 2001. The country is the world’s sixth-biggest producer, down from No. 1 in 2007.
“We will probably see interest-rate hikes in the States before year-end, and the U.S. economy is showing that it’s growing,” Sibonginkosi Nyanga, analyst at Imara S.P. Reid (Pty) Ltd., said by phone from Johannesburg. “With a stronger U.S. economy and a strong dollar, we expect the gold price not to strengthen.”
AngloGold Ashanti Ltd., the world’s third-largest producer, decreased 9.7 percent to 85.34 rand, the lowest since it began trading in 1998. Harmony Gold Mining Co. retreated 9.2 percent to 12.50 rand, also the lowest in 17 years.
Unions representing workers from the three companies have rejected the producers’ offer to raise entry-level pay for underground workers by as much as 13 percent in wage negotiations that began last month. The organizations are demanding increases of at least 80 percent while the inflation rate was 4.6 percent in May. Talks are continuing.