Despite support from a plethora of uncertainties dogging the global economic and political landscape, gold has failed to decisively break above the psychological $1,500 an ounce level; but the gathering storm on the horizon suggests it may well gallop to higher levels sooner rather than later.

The key driver for the gold market from here on is likely to be what is now being widely seen as a high probability, if not near certainty, of China’s military action to contain the disturbed situation in Hong Kong. The protests seem to be getting out of hand, having continued for several days with dire warnings ignored. China may be rather reluctant to meet Hong Kong residents’ demands for more freedom and rights.

One significant option for mainland China would be strong military intervention to bring the situation under control. In the event, there will be further flight to safety and gold is sure to benefit. Also, in the event, Hong Kong’s attractiveness as a financial centre may come into question.

Despite the yellow metal currently finding it tough to break above $1,500/oz, there is no selling pressure visible, while investor interest continues. This is evidenced by steady ETF inflows.

Global geo-politics

There are, of course, other supportive factors working in tandem. European political situation is becoming increasingly uncertain because of Italy and Brexit. The ECB is widely expected to loosen the monetary policy further during its meeting scheduled for September 12.

There is the rising possibility of the US Federal Reserve lowering interest rates at least two more times this year, with the earliest coming in by mid-September when the next FOMC meeting is scheduled. In other words, cost of money is going to be reduced in major economies.

Trade conflict between two of the world’s largest economies — the US ($18 trillion) and China ($12 trillion) — is escalating. Other countries are at risk of getting entangled, in which case it would be a full-blown global trade war. This by itself continues to vitiate the global economic climate.

Demand growth muted

Clearly, commodity markets have all but moved to ‘risk-off’ mode. There is widespread apprehension about an impending recession. The sombre mood is bound to benefit precious metals, gold and silver.

At the same time, it must be highlighted that demand conditions for gold are far from favourable. Two of the world’s largest importers — India and China — are buying less and less. The demand compression is triggered by high prices not seen in last five or six years. There is consumer resistance given rising internal prices. Falling value of currency in China and India is also adding to the landed cost.

However, huge amount of speculative capital has moved into gold and silver. In other words, the current price rally is substantially speculative froth. This froth can disappear sooner than many can imagine if market conditions change. By its very nature, speculative capital is fickle and has the tendency to move in and out of markets rapidly.

That’s why retail investors must exercise utmost caution, reflex and urgency in playing the precious metals market. Otherwise, they may be left holding high-priced contracts when the market quickly corrects. In the short run, the market can witness some profit-taking.

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

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