Pritam Patnaik of Reliance Commodities said if the Fed remains hawkish, then more upside momentum is expected for the US dollar. This could weaken the Indian rupee and push the domestic gold prices higher
Traditionally people invest in gold on Dhanteras as it is believed to be auspicious and bring prosperity for the buyer. While there is no practical evidence for the statement, but as a practice, it seems to be the first ever SIP in any asset class and goes well with the long-term investment strategy of gold.
As a tradition, one should continue with the practice and make a small investment at the current levels, however, investors should evaluate overall situation and wait for the right levels to make their allocation into gold.
The correlation between domestic and global gold prices have been out of sync in the current financial year. The global price of gold has declined due to the improving US economy and strengthening dollar.
In dollar terms, gold prices have lost nearly 15 percent since January 2018. While domestically gold futures on MCX have gained 15 percent since January 2018. As most of the gold is imported, the weakening rupee has pushed up the price of gold in rupee terms.
Overseas prices trend will be determined by the Federal Reserve's monetary policy, dollar performance and the intensity of the trade war. If the Fed remains hawkish, then more upside momentum is expected for the US dollar. This could weaken the Indian rupee and push the domestic gold prices higher.
Additionally, if the intensity of the trade war increases, this could also push overseas prices higher on gold's safe haven appeal and support the domestic prices.
On the other hand, emerging economies such as India and China are the biggest consumers of gold and weakening of their respective currencies may impact the demand for the metal.
Weakening currencies make imports expensive. It could see buyers employ a wait and watch approach before the prices steady at lower levels.
Fundamentally, the argument of lower prices could be supported after the World Gold Council (WGC) said that demand could slow down due to the current higher prices even as the festive season in full swing.
WGC said that India's demand for gold was down by 6.5 percent in the year so far. While demand in 2017 was 771.2 MT, it is likely to be at the lower end of the 700 to 800 MT range in 2018.
With the festive season in full swing, it needs to be seen if tepid demand prompts jewellers to throw discounts to lure customers. We believe that prices could see some correction initially to Rs 31,000 on the futures before rising back above Rs 33,000. This view is for the next 2-3 months.
The author is a Head Commodity at Reliance Commodities.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.