Geopolitical concerns, US Fed dovish view push spot gold to 5-year high

A weak global growth forecast amid growing trade war tensions also stoked investors towards the yellow metal. Tracking its overseas market sentiments, domestic gold prices too surged higher.

In the domestic market, prices of the most active MCX gold August futures surged to Rs 34,468 per ten grams, near to its second all-time high of Rs 34,549 hit on September 2013.

After the Fed’s dovish comments, the US greenback slid to a one-week low that pushed up the dollar-denominated gold.

Weak economic release too weighed down the US currency. Lower interest rates usually decrease the opportunity cost of holding non-yielding assets like bullion.

Gold usually trades higher during times of economic or political uncertainties. The rising risk of war in the Middle East also escalated gold’s safe-haven appeal.

US-Iran tensions were stoked after reports of attacks on oil tankers at one of the world’s main sea lanes. The US blamed Iran for the attack and this has raised concerns fresh bouts of hostility between the two countries.

In May, two Saudi oil tankers and two other ships were also attacked at the Straits of Hormuz. After the incident, the US deployed warships and bombers in the Middle East to pressure Iran, which is accused of aiding the Houthi Rebels.

Worries over a global economic slowdown continue to dampen the sentiments of risky assets. Global markets remained jittery in the recent weeks, while Government bonds in Europe and the US rallied as investors resorted to less risky debt instruments.

Concerns intensified after the International Monetary Fund cut the growth prospects of the Chinese economy on the grounds of an unsettled trade war and subsequent slowdown in industrial activities.

The long-drawn trade war pressured US labour market too. The latest monthly employment numbers from the US were rather downbeat.

The non-farm payroll numbers were downwardly revised to 75,000, less than the market estimate, hinting weak labour conditions in the US.

Similarly, the import price data fell by the most in five months in May is the latest indication of muted inflation pressure in the country.

However, as per the latest World Gold Council data, central banks have bought more gold in the first quarter of the year.

This was due to lower domestic prices due to a strong rupee and a surge in Indian jewellery demand during the traditional gold-buying wedding season. Meanwhile, gold buying for investment purposes has recorded a decline in the last quarter.

Looking ahead, the ongoing US-China trade frictions are likely to put more strain on the global economy, which continue to support gold’s safe-haven appeal.

A volatile dollar, worries over US Fed’s policy decisions, and the on-going tensions in the Middle East are likely to keep sentiments higher.

On the price front, as long as prices stay above $1,375 per ounce, expect the bullish momentum to continue towards the next resistance of $1,420, which initially needs to be cleared for further rallies to $1,500 or even more.

However, a close below $1,298 could negate the short term bullish expectations. In the domestic market, expectations of strong rupee, followed by a stable newly elected government, may restrict major gains in prices.

Meanwhile, the forecast of a normal monsoon probably lifts physical demand from the rural sector later.

(The author is Head Commodity Research at Geojit Financial Services)

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