Commodities

Gold, silver rally may not be sustainable

G Chandrashekhar | Updated on July 23, 2019 Published on July 23, 2019

A significant contributor to the gold price rally is speculative capital, which is often fickle   -  Bloomberg

A combination of favourable factors has boosted the gold market in recent weeks, pushing the metal’s price to a six-year high. Rising geopolitical tensions, continuing trade war between two of world’s largest economies, central bank purchases and expectation of rate cut by US Federal Reserve have all contributed to the yellow metal’s sharp price rise since early June.

Global uncertainties and relative weakness of the dollar has helped gold regain the safe haven status. Having conquered the psychological $1,400 an ounce mark and briefly touching $1,450/oz recently, the gold market has moved down to $1,415/oz levels.

A significant contributor to the price rally is speculative capital, which is often fickle. So, the big question is whether the current levels – in excess of 1,400/oz – are sustainable.

Fed rate cut

Although the Fed is set to cut fund rate on July 31, it is unclear as yet whether the cut will be sharp. In the event of a sharp cut – say 50 basis points – the dollar will see further weakness setting in, while a 25 bp cut may not have a strong impact as the market seems to have priced it in already.

Importantly, ECB will respond to the US rate cut which in turn can neutralise, even if partially, the dollar weakness.

While the euphoric conditions in the gold market are triggered by global uncertainties and flow of speculative investment funds, investors often forget that the physical market is not supportive of a price rally. If anything, physical demand for the yellow metal in two of the world’s largest importers and consumers – China and India – is subdued. Record high prices in both the markets are seen constricting physical demand.

In India, gold is trading at an unprecedented level – just shy of ₹36,000 per 10 grams because of the triple impact of higher international prices, hike in customs duty and the weakening rupee. At such seemingly astronomical rates, physical demand for gold is seen taking a hit. Simultaneously, scrap sales are on the rise to take advantage of the price rise.

Need for caution

So, there is need for caution because of expectation of a good chance that global uncertainties may begin to fade. For instance, the US-Iran communication has turned somewhat conciliatory. The US-China tariff war is not expected to escalate, but de-escalate, if anything. Emerging global growth concerns may make consumers more wary of investing in an unproductive asset such as gold as cash is likely to become the king.

So, gold prices well above $1,400/oz may not really be sustainable. Once a sell-off begins, price slide will be rapid.

Silver rally

In this precious metals rally, silver has turned out to be an additional favourite for investors. Hanging on to the coattails of gold, silver prices have soared from less than $15/oz three weeks ago to breach $ 16/oz and are seen trading at a 12-month high.

Silver ETFs inflows are rising, putting the holdings at a two-year high. At the same time, investor demand is rising too. Speculative longs are raising their stakes, betting on further rise in silver prices.

However, as an industrial metal, demand for silver is on somewhat shaky ground. So, going forward, the current speculation driven rally is vulnerable to correction. Silver prices above $16/oz may not be sustainable.

The writer is a policy commentator and commodities market specialist

Published on July 23, 2019

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