The yellow metal is all aglitter

After falling six per cent in May, gold prices have gained momentum in June, recovering from the low of $1,199.60 per ounce on May 30 to $1,286 at present, rising around 7 per cent.

On the MCX, the yellow metal has gone up 7.4 per cent from ₹24,810 per 10 gm to ₹30,500 in the same timeframe. Brexit and the US Fed meeting have created uncertainty for precious metals.

The recent rally is a combination of two key events that dominated the price trajectory of the yellow metal. The prime driver was the US Federal Reserve meeting, which was scheduled on June 14-15; the other event is the Brexit referendum on June 23.

Investors had almost priced out the chance of a rate hike at the Fed’s June 14-15 policy review, and see the likelihood of a July rate hike reduced to around 26 per cent since disappointing jobs data for May (non-farm payrolls for May printed at 38,000). Fed Chair Janet Yellen also stated that the rate hikes will be gradual for the second half of 2016.

After the Federal Reserve meeting, the focus of the markets shifted to the Brexit referendum, as most expected that the Britain will leave the Euro bloc, creating uncertainty across financial markets, boosting all the haven assets, including gold.

However, just two days before the referendum, expectations have changed, with polls showing that the campaign for Britain to remain in the European Union is regaining some momentum, sharpening appetite for assets seen as higher risk.

The speculative positioning for the commodity is also indicating a charm for the yellow metal. As of June 14, hedge funds and money managers held the biggest net long position in Comex gold in nearly five years. The net long position in gold has increased by a hefty 54,300 contracts to 240,862 contracts, the highest since early August 2011.

Although the Brexit fears have eased, markets will remain uncertain before the outcome of the referendum. If Britain decides to leave the EU bloc, it will create havoc across all the financial markets, boosting gold prices. If it does not leave, the speculative long positioning built by hedge funds will reverse and we might see gold prices turning lower in the weeks ahead.

From the recent price action, spot gold prices have failed to cross the $1,300/oz mark sustainably as prices have fallen from the highs of $1,315.55 (on June 16) and are currently trading at $1,286 per ounce. This is the second instance of the price falling from the $1,300 mark in the last two months.

Hence, we feel that spot gold prices (CMP: $1,286) will continue to trade lower following weakness in the recent trading sessions and head lower to $1,230 from a one-month perspective. On the MCX, gold prices (CMP: ₹30,566/10 gm) will correct towards ₹29,500.

The writer is Associate Director, Commodities & Currencies, Equity Research & Advisory, Angel Broking. Views are personal.

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