Gold & Silver

Demand for gold on the rise amid uncertainty in global markets

Naveen Mathur | Updated on January 20, 2018

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The charm in the yellow metal seems to be increasing as gold prices have risen by more than 20 per cent in the international as well as the domestic market in 2016, clearly indicating the rising investment appetite for the metal.

Besides, a fall in global equities, inflows into bullion funds, buyers’ interest in dips for the yellow metal, concerns over financial instability, and economic growth, have all been important factors for the recent rise in gold prices.

Let us assess factors that will drive prices in the near term.

Central bank policies

The Federal Reserve has refrained from increasing interest rates after an initial rise in December, with Janet Yellen, the Fed’s chair, highlighting risks from China as a prime reason.

Now that China is faring better, the path to a second rate hike ought to be clearer. That might, however, lead the dollar to strengthen and place renewed pressure on the Yuan, which would risk stoking capital outflows and, in turn, fresh concerns about the health of the Chinese economy.

In the Euro Zone, ECB president Mario Draghi has signalled that the policy on his side of the Atlantic is going to be on hold as officials wait to see how their stimulus measures play out.

That pause may hand the Federal Reserve’s Chair an opportunity to hike rates in the coming months, by reducing the risk of a sharp rally in the dollar if the two central banks conspicuously diverged.

Meanwhile, Britain holds a referendum on June 23 on whether to remain in the European Union. A vote by citizens to depart could trigger financial market turmoil, and is a source of uncertainty that may cause the Fed to pause before a rate hike.

Investment demand for gold has seen bright prospects in 2016. SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, has seen inflows this year as investors change their appetite to the safe haven metal.

In the year to date, the fund’s holdings have risen 29.86 per cent to 834.19 tonnes, indicating the regained charm in the metal.

Outlook

The Fed has more leeway now because the dollar’s strength, cited by Yellen as an argument for caution, has ebbed with the value of dollar index falling by around 5 per cent in the year till date. On the other hand, growth in the US appears to have slowed in the first quarter according to estimates, following a 1.4 per cent gain in the final three months of the last year.

Inflation remains a concern for the Fed, with low energy prices the hindrance. Wage growth in the US remains subdued, suggesting that the labour market is still slack, although the unemployment rate is at 5 per cent of the threshold, as per Fed estimates for full employment.

On the contrary, financial conditions in China seem to have eased and economic outlook appears to have stabilised, as per the recent report by the IMF. The regained investment demand, weak dollar, and instability in the Euro Zone, are all factors for gold prices to rise higher from a two-month perspective. Spot gold prices (CMP: $ in the near term can move higher towards $1,340/oz mark while MCX gold prices (CMP: ₹30,373/10 gms) can rise higher towards ₹31,500/10 gms.

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

Published on May 10, 2016

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