China and geopolitics re-ignite gold

Rajalakshmi Nirmal | Updated on January 19, 2018


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Safe-haven buying has returned on China worries and North Korea’s test

The yellow metal made a spectacular start to the year by gaining about 4 per cent in the first week of 2016. It ended at $1,104/ounce on Friday after hitting a high of $1,113 mid-week. Other precious metals didn’t fare as well, though. Silver ended the week at $13.9/ounce, up just 0.8 per cent and platinum closed at $879/ounce, down by 1 per cent. Gold’s rally also followed a sharp sell-off in equity markets this week.

The People’s bank of China set the reference rate of yuan lower on Thursday and the currency hit its lowest point against the US dollar since 2010. This stoked fears about a Chinese hard landing all over again. However, on Friday as China moved to calm the markets by setting a higher reference rate for yuan and suspending a contentious ‘circuit breaker’ on its stocks, gold lost some steam. The US Labor Department data on Friday, which showed that the job growth in December was stronger than expected, also worked against gold. After a lull, investors again showed interest in paper gold. Holdings of the SPDR gold trust, the largest gold backed exchange traded fund, increased by 7.2 tonnes to 649.59 tonnes. Reports also suggest that the People’s Bank of China’s gold reserves increased by 19 tonnes to 1762.33 tonnes in December.

Fundamentals help

Geo-political tensions, which were on the backburner for a while, moved to the frontline last week. North Korea on Wednesday announced that it had successfully tested a hydrogen bomb. This kindled fears of the developed nations retaliating with sanctions and investors took shelter in safe haven assets (Japanese yen, US treasuries), with gold leading them all. Tension in West Asia, with conflicts between Saudi Arabi and Iran intensifying, also spooked investors into buying the yellow metal. What also supported the case for gold was the sell-off in equities.

The year of the ‘fire monkey’ has brought ill-luck to China. Shanghai Composite tumbled 10 per cent last week. Countries in the EM pack have also seen bruises in the sell-off with Latin America and Europe seeing 5-6 per cent drop. The US bellwether index Dow Jones and other developed markets too have corrected by 5-8 per cent. Weak equities, a dropping dollar and geo-political tensions make the perfect recipe for stronger gold.

However, what is capping gains in gold is weak oil. Brent crude prices dropped below $35/barrel on heightened worries of a supply excess with the slowing Chinese economy — the country is the second largest consumer of oil. Weak oil prices are bad for gold as they temper inflation expectations.

Cues to watch

Technically, with the $1,100-mark behind it, gold should be able to move up further strongly. The next target is $1,130.

But given that there is a strong barrier at $1,155/ounce, the direction for the metal is not clear yet.

This week, if prices take an about-turn, they may find support at around $1,085/ounce. Keep tabs on the US jobless claims data on Thursday and the US industrial production data on Friday.

MCX gold too saw good gains last week. It closed at ₹25,982, up 4 per cent. MCX Silver closed at ₹33,824, up a little more than 1 per cent, helped by a weaker rupee. The currency ended at 66.63 against the US dollar, down from 66.14 in the previous week.

MCX Gold may try again to move past ₹26,000 levels this week. If it is successful, it can even rise to ₹26,500. On the downside, supports are at ₹25,500 and ₹25,000. Outlook for MCX Silver is bearish in tune with international silver prices. It may move within the band of ₹33,000 and ₹33,500.

Published on January 10, 2016

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