Moneycontrol
Last Updated : Jan 02, 2019 09:07 AM IST | Source: Moneycontrol.com

Gold could be attractive in 2019 on likely lower bond yields, weaker dollar

For a third year in a row including 2018, MCX gold has yielded positive returns. For 2019, too, gold looks to be an attractive asset class.

Moneycontrol Contributor @moneycontrolcom

Ravindra V Rao

Anand Rathi Commodities

When 2018 began, MCX gold was hovering around Rs 29,150 per 10 gram. Throughout the year prices continued moving in a broad range, though with a positive bias, from Rs 29,100 to Rs 32,000 due to the depreciation of the home currency. However, the upside was capped due to persistent weakness in international gold prices on account of less investment demand.

The protectionist policies of the US administration supported a rally in the dollar index instead of in gold. Therefore, the greenback rose sharply from 88 to 97. Later in the year, though, due to nose-diving crude-oil prices, domestic sentiment improved and supported an appreciation of the rupee, which recovered from an all-time low.

Hence, overall, MCX gold has appreciated by nearly 8 percent with the fall in the rupee of approximately 10 percent. Nevertheless, returns on Comex gold to international traders have been a negative 2.2 percent. The major driver of the rally in gold, i.e., investment demand in the form of ETFs, has not been so active this year, barring October, November and December.

The year was an eventful one for commodity traders. The dollar slid sharply to 88 levels initially but the Trump-led trade war with China, a historical meeting with North Korea, the NAFTA deal, the Mexico border wall issue and the Fed's stance regarding monetary policy all led to safe-haven buying in the dollar instead of in the traditional safe-haven asset, the yellow metal.

Ultimately, the dollar index for year-to-date has gone up 5 percent. In mid-August, Comex gold hit a many-month low near $1,170 an ounce due to buyers' decreasing interest in gold. As the year progressed, towards the end, typical jewellery buying emerged from India. Moreover, rising political risk in Europe because of Brexit issues encouraged investors to go long in gold-backed exchange-traded funds.

For the third year in a row including 2018, MCX gold has yielded positive returns. For 2019, too, gold looks to be an attractive asset class.

The growing economic recovery in the eurozone led investors to believe that the European Central Bank would tighten its monetary policy sooner rather than later. This, in turn, is expected to push the euro up against the US dollar and support bullion.

Brexit will be a critical matter for the UK; hence, again safe-haven buying in the yellow metal would emerge. Japan's economy also started to recover. The Bank of Japan's governor Haruhiko Kuroda also offered a positive view of the economy and inflation.

Risks for gold are skewed upward as the yellow metal has already seen its lows in 2018. We see the potential for renewed jewellery demand in 2019 from India and China along with a strong investment demand as we expect to see lower bond yields and a weaker US dollar in 2019.

The Federal Reserve will only be able to raise interest rates once or twice in 2019 as the US. economy starts to slow down. To sum up, the rise in investment demand and a dovish US Fed could likely weigh on the US dollar and support bullion prices.

(The author is the Head - Commodity Research & Advisory at Anand Rathi Commodities.)

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jan 2, 2019 09:07 am
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