If interest rates remain lower, then the cost of holding gold will come down and the dollar will fall further
Spot prices of gold in the international market hit their highest level in three weeks on December 4 as fears of a US-China trade war cooled off, resulting in the dollar index coming off its highs.
Safe haven demand, which lifted the US dollar when fears of a trade war were rampant, is now cooling off as the US and China are in talks to resolve tariff issues, and comments from the US Federal Reserve indicate that interest rates are near the end of the tightening cycle.
These events are providing fresh opportunities to gold investors. If interest rates remain lower, then the cost of holding gold will come down and dollar will fall further.
International spot gold prices bounced back from their recent low of $1,216.80 per ounce as the dollar index corrected from its recent high of 97.45.
Domestic gold prices are also following a similar positive trend as the rupee appreciated to 69.58 per dollar recently, keeping prices supported at lower levels.
G-20 meeting outcome
Trade tensions between the US and China are cooling off post the G-20 summit. US President Donald Trump and his Chinese counterpart Xi Jinping agreed not to introduce any new tariffs for the next 90 days.
Trump said China has agreed to “reduce and remove” tariffs on American cars from the current bracket of 40 percent. The dollar index reacted negatively to this development, supporting an uptick in gold and risky assets. However, the outlook is turning negative for gold as geopolitical tension lightens.
As per the latest US CFTC report for November 27, speculators increased their net short positions in gold by 8,464 contracts to 51,828.
Brexit vote on December 11
UK parliament will vote over Brexit on December 11, after five days of debate. If Britain passes the bill, then the European Parliament will get a vote before Brexit day which is in 2019 March. If Britain’s PM Theresa May fails to pass the bill in Parliament, then the opposition is likely to prepare for a no-confidence motion. This uncertainty is likely to keep gold prices buoyant in the short term.
Fed Meeting on December 19
Minutes from FOMC November meeting indicate another interest rate hike should be expected. However, Fed officials also kept the debate open on when the US central bank might pause its monetary tightening and how it would relay those plans to the public. The next meeting is scheduled for December 18 and 19. We are closely watching the Fed's next step.
Physical buying in India
Indian gold demand shines last week as local gold prices dropped to their lowest level in six weeks by Rs 2,173 per 10 gram or 6.73 percent from the recent high, as rupee got strength against the US dollar after a sharp decline in oil prices.
Indian Gold prices follow USDINR direction closely as India imports nearly 700-800 tonnes of gold annually. The RBI meeting scheduled for this week is likely to give a fresh direction to the Indian Rupee.
International Spot Gold prices bounced from recent lows after the meeting between US and China during the G-20 summit. The precious metal is facing stiff resistance near $1,238 while important support is seen near $1,195.
Gold prices are likely to find fresh direction from non-farm payroll data this week and the Fed meeting later on December 19. A break out above $1,238 may push the counter towards $1,252-1,266 in the near term as long as it remains above $1,216.80.
MCX Gold February month expiry contract has broken a key resistance level near Rs 30,880 which may push prices towards next level of resistance around Rs 31,330-31,800 in the near term as long as it remains above the key support level of Rs 30,460. Any major correction in the Indian rupee from current levels poses a risk to our view.
MCX Gold Feb expiry contract can be bought near Rs 30,880-30,800 range with a closing stop loss below Rs 30,460 for a target of Rs 31,330-31,800.
(The author is Chairman of the ABans Group of Companies)Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.