Gold & Silver

Geopolitical tensions, and a burst of positive factors, lift gold prices

G Chandrashekhar | Updated on January 15, 2018 Published on April 12, 2017

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Two recent geopolitical events – the US missile strike on Syria and rising tensions in the Korean peninsula – seem to have given gold a fresh lease of life, with safe-haven buying pushing up prices of the yellow metal closer to $1,300 an ounce.

The upside move comes on top of two other supportive developments. The first is the emerging possibility that the Fed is unlikely to hike interest rates in June. Expectations of a 25 bp rate hike have begun to fade now, given that economic data, including the latest payrolls, do not seem to augur well for raising rates anytime soon.

The other factor is even more solid. Physical demand in two of the world’s largest importers and consumers – India and China – has been picking up in recent months. After the demonetisation-driven disruption, which stymied physical buying since November 2016, the Indian market seems to be back to near-normal.

There is a certain optimism about future imports by India because of the belief that things cannot get any worse after last year’s duty, tax and currency-related pressures on the precious metal market. Imports in January were an estimated 60 tons, according to official data, and are expected to be higher in the next two months.

The recent appreciation of the rupee is also seen to benefit the yellow metal although the rally in global markets has robbed the Indian consumers of the full benefit. Even so, local prices are less than last year’s average — and, to that extent, attractive.

There are other broader issues relating to the Donald Trump administration that cast a shadow of uncertainty. The President had promised tax cuts for corporates and massive investments in infrastructure development. Three months on, opinion is gaining ground that there is visible lack of progress on the plans for tax reforms and infrastructure investment. Also, there has been a drop in bank lending to corporates. All these seem to have turned the monetary policy tide back in favour of gold, according to an analyst.

Typically, the impact of geopolitical factors on gold lasts only for a short period. Once the geopolitical tension abates, a price correction should set in. But at this point in time, there are some solid supportive factors (on the physical demand side and the US monetary policy side) to provide a floor for gold prices. The latest rise in crude oil prices should also prove to be positive.

The next few days are crucial. How the ongoing geopolitical developments pan out remains to be seen. If they escalate, the yellow metal is sure to breach $1,300/oz. At the same time, the speculative long positions on the bourses are also touching record levels. There will inevitably be profit-booking by less-committed investors.

In India, the upcoming marriage season (in May) will see a spurt in physical demand for the yellow metal. By now it is recognised that ₹30,000 per 10 grams is the defining price for gold demand in India. If the price moves above ₹30,000 per 10 grams, there will be some demand compression. From June onwards, retail purchase may remain lacklustre for about four months till harvest time in September.

The writer is a Commodities and Agribusiness Specialist. Views are personal

Published on April 12, 2017
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