Does gold have more upside potential after Diwali?

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After a year-long feebleness, gold prices regained momentum pushing prices to a three month high in the international market. Domestic prices too follow suit.

Since the start of the year, the benchmark London gold prices were under intense pressure, tumbling more than 13 percent due to a strong dollar and weak investment demand.

Even as sentiments stayed subdued in the international market, domestic prices held firm, supported by a weak local currency.

An overall breakdown of global equity markets reinvigorated gold’s safe-haven appeal again and pushed prices higher. The Dow Jones index corrected about nine percent since the start of October owing to weak earnings outlook of companies and concerns of U.S economic growth.

Indian equities too slid considerably with the CNX Nifty index declining more than 14 percent from its all-time high of 11,760 it hit at the end of August.

Gold usually gains when global equities tumble. The yellow metal is considered as an alternative investment during times of financial and political uncertainty.

Concerns over slowing global economic growth and the impact of tariff clashes between world’s two largest economies influenced the investor sentiments.

Anxiety over Brexit, Italian budget crisis and health of emerging markets hit the investor confidence as well, prompting them to bet on safe-haven assets like bullion.

Later, worsening US and Saudi relation on the killing of dissident journalist and sanctions on Iran were other factors, which not only bolstered crude oil prices, but also fanned inflation worries.

Inflation could bring down the value of one’s portfolio and investors usually invest in gold to beat the inflation risks.

In the meantime, Holdings of the SPDR Gold Trust, the world’s largest ETF has also surged to its highest level since September indicating an increased investment demand for gold.

Gold’s safe-haven appeal had darkened earlier and there was little impact on gold on rising global geopolitical tensions. A strong dollar attracts more safe-haven flows toward it than gold.

Growing US interest rates reduced gold’s appeal as a safe haven. A firm greenback makes gold expensive for holders of other currencies as gold is priced in dollar.

Since the US administration starts imposing a tariff on imports to the country, the dollar index strengthened and it is currently placed near its multi-month high.

At the same time, activities in the domestic market are now lower than normal due to higher prices. A sharp jump in domestic prices was seen since mid-August with the most active MCX futures gaining over nine percent so far due to a weak currency and a surge in overseas prices. Gold demand in India is usually higher during the last quarter due to seasonal demand.

Gold buying is considered auspicious during wedding season and major festivals like Diwali and Dhantheras. The prevailing turnaround in prices is due to ongoing weakness in equities and worsening geopolitical conditions.

Looking ahead, if equities continue to weaken and global geopolitical conditions remain the same, the positive bias for gold is likely to continue in near future.

However, there are chances for a correction in domestic prices as the peak festival demand likely to end soon and a possible strengthening of the domestic currency.

First appeared in Moneycontrol

Posted: October 2018

 

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