Geojit Financial Services Blog

‘Gold may pause six-month gaining streak, correction in prices likely’

Agencies like IMF have reduced their global growth forecast for this and next year primarily due to the US-China trade war, which has spurred gold’s safe-haven demand
Spot gold is poised to post its fifth straight month of gains in February. Since last October, prices in the key London spot market gained more than 13 percent due to an overall breakdown in global equities and escalating geopolitical tensions. Apprehensions over slow global growth forecast and an ongoing trade dispute between the US and China has lifted gold’s safe-haven appeal.
The US government’s partial shutdown, Brexit tensions, and health of emerging markets (EMs) hit investor confidence, prompting them to bet on safe assets like bullion.
Agencies like IMF have reduced their global growth forecast for this and next year primarily due to the US-China trade war, which has spurred gold’s safe-haven demand.
Considering the fact it is a consumer goods and long–term saving vehicle, gold demand historically has been positively correlated to economic growth.
Expectations of the US Federal Reserve’s liberal monetary policy assisted the yellow metal. In the latest policy meeting, the US central bank hinted that they would put an extended pause on increasing interest rates.
Usually, gold faces headwinds from higher interest rates and a strong dollar. Gold’s performance was largely affected by a strong dollar in previous years.
Increased demand from central banks too assisted the price. Surging economic uncertainty and heightened geopolitical tensions prompted central banks to diversify their reserves in safe-haven assets like bullion.
Last year, central bank purchases of gold reached a multi-decade high of 651.5 tonnes. As a safe haven, gold’s demand historically has been strongly responsive to periods of heightened risk.
Domestic gold is currently trading at multi-year highs. In the key MCX futures platform, prices are convincingly placed well about Rs 33,000 for ten grams, its highest level since October 2013.
This was due to soaring overseas prices, weak INR and domestically charged high premium. At the same time, local demand is reportedly lower as high retail prices prompted investors to stay away from taking big positions.
In the meantime, the six-month-long gaining streak may be paused and is likely to trigger some healthy corrections in prices. The trade talks between the US and China have begun, which is expected to end with a deal possibly by end of this month. A positive outcome would ease tensions on global growth outlook and lessen gold’s haven appeal.
A decline in the holdings of the gold exchange-traded funds and liquidation of net long positions by fund houses also hint at chances for a corrective sell-off.
However, the structural global economic reforms in emerging markets, especially from the key consumers like China and India are likely to prop up gold’s physical demand later. More central bank purchases, volatile global equity markets, and mounting geopolitical tensions possibly assist prices later.
On the price front, though the trend remains upward, a healthy correction is on cards as long as $1,365 caps upside. However, $1,260-1,228 would act as stiff support for a swift upturn later.
Chances of a trend reversal are seen only if it closes below $1,160 which is least expected. Similarly, a break above $1,365 would be an early signal of renewed buying interest in the counter.
In the domestic market, a correction towards Rs 31,500-30,000 per ten grams is likely, but beyond the same is doubtful unless there are any key changes in its fundamentals.

Posted: February 2019

First Published in Money Control Link.