Gold at lifetime high. What are the major triggers?

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Gold prices recently touched a historic high in both the international and domestic markets. The benchmark London Spot Gold hit a lifetime high of $2195 an ounce in the first week of March, surging more than 6 percent so far this year. Tracking the overseas sentiment, domestic gold prices also surged, placing prices well above Rs 66,000 per ten grams.

Rising hopes of US interest rate cuts have aided gold prices. In addition, the weak global economic outlook, escalating geopolitical tensions, unpredictability surrounding the US presidential election, and higher central bank purchases have offered support to the yellow metal.

The recent economic releases from the US and comments from the Federal Reserve officials have buoyed investors’ hopes that the central bank may likely cut its key interest rates in June, boosting the appeal of gold. However, the central bank is waiting for more data to confirm whether inflation is heading convincingly toward its target of 2 percent.

A cut in interest rates will cause for lower yield for dollar-denominated assets which can lead to a decline in the value of the US dollar. Since gold is priced in US dollar globally, a weaker dollar makes gold cheaper for investors holding other currencies, which can increase the demand for gold and thus its price.

Projections of a weak global economy amid worsening geopolitical crisis are the other key factors behind the sharp spike in prices. While the US has projected positive economic growth this year, there are estimations of a slowdown in other developed economies like Germany, Japan, and the UK. Economic de-growth typically increases the demand for gold as it is considered a hedge against inflation.        

Investors consider gold as a hedge against ongoing geopolitical instability. The war between Israel and Hamas, and Russia and Ukraine along with the Presidential election in the US in November are looming in the minds of investors.

Central banks are the key demand driver of gold in recent times. As per World Gold Council data, central banks have been buying gold at a record pace since 2010. In the last two successive years, central banks have acquired over 1000 tonnes and in 2024 the trend is expected to be intact. A vast majority of these purchases came from the central banks of emerging markets and many of them have been the regular buyers over the past few years.

Taking cues from the overseas market, domestic gold also posted new lifetime highs. The most active MCX gold futures surged to a peak of Rs 66,356 per ten grams in the first week of March, gaining about 18 percent in the last twelve-month period.

However, prevailing record-high prices are likely to dampen local consumption as buyers prefer to postpone their purchases. This would also cause a halt in imports and attract possibilities of more scrap supplies.

Looking ahead, though there are chances for an imminent correction, the broad bullish outlook remains intact due to healthy fundamentals. Weakness in the US dollar, hopes of interest rate cuts, escalating geopolitical tensions, worries over the global economic outlook, and high central bank purchases would be positive triggers for the commodity. Meanwhile, firm global equities and any changes in the Fed’s policy decisions would cause a downturn in prices later.

First published in Mint

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