Gold is facing an unusually tricky situation. There are supportive factors in place, but the positive impact on its price is negligible. Even increasing risk aversion has not lifted the yellow metal. Poor price performance is seen causing anxiety and unease among traditional investors many of whom are die-hard gold bulls.

Geopolitical tensions, economic uncertainties, floundering trade talks, central bank purchases and similar usually supportive factors have not helped the metal decisively break above the $1,300-an-ounce barrier. It is still languishing at around $1,280-1,285/oz levels.

Central banks of several countries have recently purchased gold. China and Russia bought 15 tonnes each in April. Others include Turkey and Kazakhstan.

A key reason why gold is not budging from the current levels is the role of financial investors themselves. Even in these times of uncertainty, they are not ready to bet big on the yellow metal. If anything, gold ETFs have seen some outflows recently. There is palpable pessimism about gold among speculative financial investors as evidenced by liquidation on long positions, as per a CFTC report. How long the sentiment will last is anybody’s guess.

Belief is gaining ground that gold’s safe haven status has been taken by the US dollar. It is recognised that the dollar and gold have an inverse relationship. Many are betting on the dollar in the context of the US-China trade dispute.

Gold’s poor price record of late is dragging down other precious metals, too. Silver, platinum and palladium have also seen ETF outflows in recent days. Net long positions in platinum have been completely squared off while net short positions in silver have been created. Interestingly, punters place high hopes on the new Indian government, which they believe will put money in the hands of the rural population, which, in turn, will spur demand for the precious metal. Of course, it is well known that India is a large importer and the country’s rural areas are large consumers of the precious metal for a variety of reasons, including marriages, festivals and so on.

India’s gold imports have spurted in the last two months because of the marriage season and anticipated demand from Akshaya Trithiya bargain hunters. April arrivals were an estimated 58 tonnes. The firming up of the rupee has made the metal less expensive locally, helping boost sales.

On current reckoning, the outlook for gold is constructive. In the months ahead, global economic growth is expected to remain subdued, which, in turn, will negatively impact the stock market. It is in such an eventuality that gold’s traditional safe haven status will assert itself. Investors in equities will move to gold, providing a boost to prices that are currently languishing. Silver, which usually rides on the coattails of gold, will benefit, too.

The key point to watch would continue to be the demand side. There is risk; demand in both India and China may disappoint. The Chinese currency is weakening, making imports more expensive. In India, unless the rural areas witness a marked increase in incomes, demand may be muted.

The new government will present a Budget sometime in July. Efforts will be made to lobby policymakers for a reduction in customs duty; but New Delhi is most unlikely to succumb given the huge fiscal challenges and on revenue considerations.

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

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