Geojit Financial Services
Spot gold on the benchmark London Metal Exchange (LME) closed 2018 down by about five percent, near $1,282 an ounce. Though prices fell to a one-year low of $1,160/oz in August, an overall breakdown in global equity markets and escalating geopolitical tensions reinvigorated gold’s safe haven appeal in the last quarter of 2018.
Concerns over slowing global economic growth and the impact of tariff clashes between world’s two largest economies influenced investor sentiment. Anxiety over Brexit, Italian budget crisis and health of emerging markets hit investor confidence as well, prompting them to bet on safe haven assets like bullion.
Rising US interest rates had reduced gold’s appeal as a safe haven earlier. A firm greenback makes gold expensive for holders of other currencies as the metal is priced in dollars. Since the US administration started imposing tariffs on imports, the dollar index strengthened and is currently placed near its multi-month highs.
In the meantime, even as sentiments stayed subdued in the international market, domestic gold prices held firm, supported by a weak local currency. A weak currency increases the landed cost of commodities imported into the country. Gold in key MCX futures started the year at Rs 29,160 per 10 grams and closed at Rs 31,391, up about eight percent.
The rupee has weakened by more than nine percent due to a strong dollar and weak momentum in emerging market currencies. Widening current account deficit and net capital outflows influenced the shortage of dollar liquidity which is reflected in the rupee.
Since the start of the year, many emerging market currencies like Turkish lira, Brazilian real and South African rand have dropped sharply. During the second week of October, the rupee hit an all-time low of Rs 74.48 versus the dollar but closed at Rs 69.56.
If equities continue to weaken and global geopolitical conditions remain the same, the positive bias for gold is likely to continue in the near future. A tight trade inside $1,370-1,160 an ounce would be seen initially. A break either side would suggest fresh direction. On the domestic front, a recovery in rupee ideally makes gold prices weak and vice versa.
Silver prices in the international market traded down by about nine percent, while domestic futures prices almost held steady. Looking forward, silver is likely to follow gold and edge higher, but multiple resistances are seen at $15.55 and $17.70/ounce. A direct drop below $13.60 would call for major liquidation pressure in the counter. Silver prices in the international market traded down by about nine percent.
A strong dollar and bearish sentiments in the entire metal complex have contributed to the fall. On the domestic side, prices held steady largely due to a weak Indian rupee.
Though investment demand remains on the lower side, physical demand from electric vehicles and solar panel segment is likely to support prices. Reports of supply shortage may also assist sentiment later.
Reports say silver market was in deficit last year, the fifth consecutive year of deficit. Key producers like Peru, China and Argentina has reported a decline in output due to supply disruptions last year.
Silver is likely to follow gold and edge higher, but multiple level resistances are seen at at $15.55 and $17.70/ounce. A direct drop below $13.6/oz would call for major liquidation pressure in the counter. In MCX futures, while prices stay above Rs 33,000/kg, expect gold to continue its mild positive bias.The author is Head - Commodity Research at Geojit Financial Services
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