Gold loses haven appeal as dollar’s clout grows

G Chandrashekhar | Updated on August 17, 2018 Published on August 16, 2018

  Incurable gold bulls have never been as thoroughly disillusioned as in recent times. Not very long ago (say until five years ago or till early 2013) they had witnessed what by today’s standards can be described as astronomical prices of $1,700-1,800 an ounce.

The gold market created a record of registering annual double-digit growth for 12 long years in succession until 2012.

But that’s history. The precious metal — a unique embodiment at once of an investment asset class and a consumption asset class, commodity and currency, as also a haven asset — is today an embattled one struggling to arrest a free fall.

Prices have broken below the $1,200/oz psychological barrier and continue to hurtle toward $1,150 levels in New York. On August 15, bids for $1,167 were seen.

It may be somewhat perplexing that at a time when there is so much of political and economic uncertainty and looming risks, gold is not performing to its attributed potential.

What gives?

The inverse relationship between the dollar and gold has never been as pronounced as now. The greenback is currently in considerable demand, having risen to multi-month highs in the wake of the robust economic performance of the world’s leading engine of growth. As of now, the dollar has in some way replaced the yellow metal as a haven asset.

A steadily strengthening dollar is negative for gold; and there is more steam left in the greenback’s strength. All signals point to two more interest rate hikes the US Federal Reserve will announce in the months ahead this year. In other words, the dollar will continue to gain strength into 2019. The second but more important reason is lacklustre demand growth. Demand — whether for consumption or for investment — for the yellow metal in the top two markets of the world, China and India, stands enervated.

Indications are that jewellery demand in the two quarters ahead will stay softer, and possibly well into 2019. The key consuming markets China, India and Turkey have their own individual problems.

The Chinese economy is slowing decisively, while Turkey faces a currency crisis. In fact, Turkey recently sold some gold to shore up its currency reserves.

India’s South-West monsoon has so far progressed less satisfactorily than expected (10 per cent below normal), which may impact rural incomes and therefore rural demand.

Is this the end of the road for gold or is there any hope in the times ahead? The situation is fraught with possibilities.

The road ahead

One scenario for the second half of 2019 suggests that the interest rate hikes of the US Fed will begin to bite. The boost received from the fiscal stimulus will begin to fade and the economic growth rate risks a slowdown with the cumulative effect of monetary tightening.

Worse, if trade tensions spiral out of control and more nations are sucked into the trade war, there will be an overall slowdown in global economic growth. It will hit the equities market, weaken the dollar and prove beneficial for gold. To be sure, it is one of the possible scenarios and may possibly play out one year from now. Watch this space.

The author is a policy commentator and commodities market specialist. Views are personal.

Published on August 16, 2018

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!


Support Quality Journalism
This article is closed for comments.
Please Email the Editor
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.