Gold & Silver

Why are gold prices rising?

Rajalakshmi Nirmal BL Research Bureau | Updated on August 07, 2019 Published on August 07, 2019

The returns in Indian gold prices has outpaced the returns from equity markets this year.   -  Reuters

Fed rate cut, sell-off in equities and central bank buying help the yellow metal rally

Looks like the bull market in gold has begun after a pause. Indian gold prices have hit an all-time high. MCX Spot gold price is at ₹36,386, 25 per cent higher over prices in the same time last year. Escalating trade tensions between the US and China, the Fed rate cut and drop in rupee vis-à-vis the US dollar are reasons for the yellow metal seeing a strong rally (at $1484/ounce now). IMF too has recently downgraded its global growth outlook for 2019 to 3.2 per cent from 3.3 per cent predicted in April.

Read more: Slowing growth fuels demand for yellow metal as safe heaven

Gold’s appeal as a safe haven asset increases in times of geo-political tensions. Since last week, as the US announced additional tariffs on Chinese goods, there has been a rout in global equity markets, lending support to prices of precious metals. In the last five trading sessions, while the Dow Jones and Nasdaq indices are down about 4 per cent, Euro Stoxx is down 4.9 per cent, FTSE 100 down by 6 per cent, Nikkei down by 5 per cent, Hang Seng down by a sharp 7 per cent and Shanghai Composite down 5 per cent. In India, however, the sell-off has not been sharp given expectations of rate cut from RBI in the Wednesday’s meet and stimulus for ailing industries from the Finance Minister soon. Nifty and Sensex dropped just about 1 per cent over the last one week.

Investors who bet on gold are better off compared to those who put money in equity this year.

Year-to-date while Nifty is up only 1 per cent, the bellwether index Sensex is up 2.5 per cent. This compares poorly to gold prices that have delivered a return of 15 per cent in rupee terms (14 per cent in dollar terms). If global trade tensions continue in the months to come, there is room for solid gains on the metal even from here. Target $1500 is the closest and looks achievable even on technical charts.

Outlook

Global gold prices are still way below the 2013 peak of $1696/ounce. Though Fed Chairman Jerome Powell suggested that a series of rate cuts may not happen, Trump’s action against China in the last few days are suggesting that more rate cuts from the Fed can’t be ruled out. And, if this turns true, investment demand for gold may fill the vacant space of consumption demand.

Rising gold prices over the last few months have been observed hitting demand in large consumer markets for jewellery including China and India. Also, one can’t say with certainty that the greenback will continue to hold up at its current levels. On Monday, after China devalued Yuan by a sharp 2 per cent against the USD, the US dollar index didn’t see a big impact – it dropped from 98 to only 97.5. However, if there are more rate cuts or intensified trade tensions that impact the US economy, dollar may well loose its sheen to gold.

The fundamentals of gold look good.

In Q2 2019, gold demand was 1123 tonnes, up 8 per cent, Y-o-Y helped by higher central bank purchases and ETF demand. Central banks bought 224.4t of gold in the April-June quarter of 2019. The total buying by central banks thus rose to 374.1t in the first half of the year – the largest net H1 increase in global gold reserves in WGC’s 19-year quarterly data series. Demand for gold ETFs totalled to 67.2 tonnes – which is double of what was recorded for the same quarter last year.

Investors however will have to brace for more volatility in gold prices given the risky geo-political environment. You can invest 10-15 per cent of the portfolio in gold. Sovereign gold bonds, are the best route to invest in the metal. Currently, an issue of sovereign gold bond is open (closes on 9th August - Sovereign Gold Bond Scheme 2019-20 - Series III). The face value of the bond is ₹3,499 per gram. For investors applying online and making payment against the application through digital mode will get a discount of ₹50 per gram.

Published on August 07, 2019
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.