Gold prices: Reason to cheer?

• HDFC
• 10 Sep 2018
• Knowledge Centre

HDFC, Tester

Though gold prices have been falling persistently, there is still a view that a recovery will be visible in the long term. According to a report carried in Kitco News, a website covering updates on metals, even though gold prices have witnessed a consistent downtrend, the World Gold Council (WGC) sees the potential for a recovery later this year.

 

In the report, the WGC said that increased consumer demand and reversal of extreme bearish speculative positioning could help push gold prices up from their recent 1.5-year lows. The report added that WGC sees the potential for a rebound, even in the face of a strong US Dollar.

The rationale

 

“The Dollar's strength has been one of the most important drivers of gold's performance this year. Confrontational trade rhetoric and sanctions have so far played out in favor of the US. But gold may rebound due to both technical and fundamental reasons.”

 

According to the council, bearish speculative positioning is at historic highs and is not sustainable. “In recent years, a large increase in short positions has been followed by a sharp rally in gold. And while net shorts were more prevalent in previous decades, there have been structural changes that make these positioning levels different, and likely to be short-lived,” the report said.

 

The WGC noted that growing demand from India and China (which is 50% of the global market), a shift in miners’ hedging practices, and the metal’s low opportunity costs as bond yields hover around 3%, are reasons that could help reverse gold’s current fortunes. “But a bounce back in gold prices can only be sustained if there are fundamental reasons to encourage consumers and long-term investors to seek exposure to gold,” the report said.

 

Looking ahead, the WGC said that growing geopolitical risks due to rising global trade tensions, and apprehension over equity market valuations could create fundamental demand for the yellow metal. Other contributors to demand will below-interest rates coupled with rising inflation pressures, and a flattening yield curve in the US.

Causes for upswing

 

“A period of heightened geopolitical risk with the potential to impact the global economy could, thus, be supportive of gold, even if the Dollar were to strengthen,” an analyst said. “Gold could trade lower if the US Dollar increases strength. But in the light of positioning in the US, and increased interest from buyers in China and India, risks seem skewed towards a recovery,” he added.

 

Gold prices hit a one-month high at Rs 31,000 on 27th August 2018, largely owing to the upcoming festive season. The Kerala floods are expected to be a big dampener to gold sales during the festival and wedding season from end August 18 to December 18. This factor is important, as Kerala is India’s biggest gold-buying state. However, going ahead, other factors like rising crude oil prices, currency depreciation, inflation, and the US-China trade war could boost gold prices.