Gold prices gain 2.5% in the last week

Spot Gold prices have gained despite dollar strength as demand for the yellow metal has increased as it is considered as the asset of last resort. Investors have become susceptible over the uncertain financial market scenario and troubles on the Euro zone front. This has dented appetite for riskier investment assets and led to rise in demand for gold as a traditional safe-haven despite a stronger dollar. We expect gold prices to trade with an upside bias in the short-term. At the same time, the dollar is expected to strengthen further. Hence, sharp gains in the yellow metal could be capped due to stronger dollar.

The Euro slumped sharply in the last few weeks as markets remained uncertain over the Greece issue. Even though the Greece has been offered a bailout by the EU and the IMF, concern over other member’s debt woes continues. Spain, Portugal, Italy and Ireland stand next in line with their debt issues. These worries lowered the appeal of the euro which touched a low of 1.2520 in the last week. On the other hand, the US dollar gained more than 3% in the last week as economic concerns in the Euro zone led to financial uncertainty. This led to demand for the low-yielding dollar as a safe-haven. The dollar also gained on the back of positive economic data which raised hopes of a rise in interest rates in the coming months.

The global economy continues to face a dilemma as on one hand markets witness a host of positive economic data announcements from the US. But on the other hand, debt issues in the Euro Zone are making investors wary over the strength of the recovery. Issues in the Euro Zone are expected to accelerate further and this will deteriorate sentiments in the financial markets. The US is witnessing a better economic scenario as companies start hiring on the back of better business prospects. The housing market in the US has also improved and led to better sentiments across global markets. But a major driver which is China has dented market sentiments further by raising interest rates in order to curb escalating growth. Higher interest rate in the fast growing economy is raising fear of slowdown after a long recession which was mainly being seen in the Western World.

Fundamental Outlook

Economic concerns in the Euro zone will continue to haunt sentiments in the financial markets. Mixed sentiments will continue to prevail as markets cope with two separate developments – 1) Positive US economic data and 2) economic worries in the Euro area. Economic data from the US is expected to be positive and that will help markets gain some strength. This positive economic data could boost hopes of a rise in interest rates in the US and lead to strength in the dollar. The dollar will also gain on the back of existing economic worries in the Euro zone. Despite the rescue package provided to Greece, markets will now question and doubt the debt situation of other Euro member nations namely, Spain, Portugal, Ireland and Italy. This ongoing financial uncertainty regarding Euro Zone will continue to provide upside to gold prices despite dollar strength as economic worries will raise demand for gold as a safe-haven.

Major economic data releases in May which will help to set the trend in the markets are Manufacturing PMI, ECB Press Conference, Unemployment Claims, US Unemployment Rate, Retail Sales Consumer Confidence and FOMC Meeting Minutes.