Gold has struggled for much of this year amid US dollar strength and Federal Reserve policy-rate tightening. After languishing at around $1,200 an ounce levels for an extended period of time despite geopolitical and other uncertainties dogging global markets, gold seems to have broken out of its shell and is widely believed to be on the comeback trail.

With risk aversion taking centre-stage in the wake of increased volatility, the sell-off in the equities market, starting with the United States, has helped the yellow metal gradually regain its much-vaunted safe haven status.

By mid-October there was a rally in gold prices triggered by clear signs of short-covering, with financial investors reducing their short positions substantially. Trading below $1,230/oz at the beginning of this week, rates climbed to $1,240 on Thursday with technical follow-up buying aided by ongoing tensions between the US and Saudi Arabia.

Given that the short positions on the bourses are still considerable, there is the distinct possibility of a further price rise. Increased gold buying by central banks is also a contributory factor.

Indeed, the buzz is that continued protectionism coupled with the risk of two of the world’s largest economies slowing — China currently and the US sometime next year — could potentially lead to a global downturn, which should help the precious metal.

The American factor

Despite the current upbeat mood and strong growth in the US, many economists already believe that the fading effects of fiscal stimulus and tighter monetary policy will soon start to weigh on the US economy.

Some even suggest that by mid-2019, the Federal Reserve may be forced to reduce — rather than hike — the policy rate. In the event, the dollar risks losing some of its current strength.

By their very nature, commodity markets move not on current fundamentals but based on anticipated changes in the future. From that perspective, gold market participants are already anticipating ‘risk-off’ market conditions several quarters ahead, which should boost demand for the yellow metal.

At the same time, the physical demand conditions are far from supportive. Demand in two of the world’s largest consuming markets, China and India, is weak. The data are revealing: gold imports into China in September stood at 48 tonnes, down a whopping 37 per cent month on month and the lowest in the last 12 months.

The Indian demand situation, too, is subdued. According to government data, last month, imports were worth about $2.6 billion (down close to a third month on month), which equates to about 65 tonnes of gold. This is clearly the effect of the price surge the bullion market witnessed because of the rupee’s rapid depreciation.

In the first nine months of this calendar year, India’s imports have been weak, down by about 8 per cent. The much touted festival season demand too did not elicit any robust purchases by consumers.

Notwithstanding the enervated physical demand situation in Asia, one factor that is likely to prove positive is the expectation that central banks will buy more gold.

Over the next two months, the precious metal could come under renewed pressure given the possibility of one more Fed rate hike in December. However, going into 2019, gold could regain its sheen and gradually move towards $1,300/oz.

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

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