The unsolved trade dispute worries, heightened security issues with Iran coupled with a weak rupee will only act tailwind to gold prices in the Indian market
After a pretty rewarding previous year, Gold entered 2020 with strong momentum. London spot prices jumped to a new six-year high $1,610.9 an ounce, due to flare-up in tensions between US and Iran.
The fast-rising tensions in the Middle East stoked the demand for gold as a safe asset. The year 2020 started with an increased economic optimism owing to Phase-I of the US-China trade deal and improved global economic numbers.
However, the sentiments softened after the outbreak of fresh tensions in the Middle East. The US Drone strike killed a top Iranian Military General on January 3 and Iran responded with a ballistic missile attack on Iraqi airbases hosting US forces.
The incident created a war-like situation between the US and Iran. Increased uncertainty in the region dented risk sentiment sending investors to safe-haven assets like Gold.
The feeble global economic outlook amid a trade disputes between the US and China has been supporting the Yellow metal. Last year, Gold gained about 18 percent in the overseas market and a whopping 23 percent in the domestic market.
Low-interest rates, steady dollar, Brexit and other geopolitical tensions also boosted Gold’s demand. At the same time, a weak domestic currency offered additional support to Indian gold prices.
Global economic outlook and geopolitical sentiments direct Gold’s trend.
The Phase-I trade deal between the US and China eased trade tensions to an extent, but the dispute is still unsolved. Traders remain clueless on the deal and its impact on the global economy.
A successful deal can settle the ongoing economic feebleness that would limit Gold’s haven demand and vice versa.
The unprecedented worries over Britain’s exit from the European Union have continued for the last three-and-a-half years. However, this uncertainty somewhat eased after the recent UK election which has sparked renewed Brexit optimism.
An orderly Brexit can make the near-term economic and political outlook of the region rosy and dramatically reduce the ongoing economic uncertainties.
Gold is the best investment during geopolitical uncertainties. Intensifying tensions in the Middle East and the Korean peninsula are raising concerns of a fresh bout of hostility between countries.
Military operations in Northern Syria by Turkey and protests in Hong Kong have dialled back risk appetite in favour of safe-haven assets.
It is expected that the US Federal Reserve is unlikely to raise rates in the first half of 2020 that may keep a cap on US dollar. A weak dollar usually lifts Gold higher.
Domestic demand and currency performance will be the key pillars of Indian Gold as per World Gold Council data. Indian Gold demand in the previous year was discreetly down due to high domestic prices.
A slowdown in the economy, distress in the farming sector and a hike in import duty also dampened urban and rural consumer demand in the country.
The performance of Indian Rupee (INR) will set the direction of Indian Gold prices. A weak INR will put an additional burden to customers as currency weakness lifts the landed cost of the commodity to the country.
INR has been on the losing streak for the last two years, losing about 12 percent. It depreciated about 60 percent since 2010 as well.
However, as per Reuters' forecast, the rupee's weakness likely to continue due to persistent a slowdown in the domestic economy.
Even after aggressive rate cuts by the Reserve Bank of India (RBI) and economic stimulating measures by policymakers it failed to gain momentum.
Looking ahead, the unsolved trade dispute worries, heightened security issues with Iran coupled with a weak rupee will only act tailwind to gold prices in the Indian market. If conditions are favourable, 50,000 per ten gram can also be achievable in the near future.
(The author is Head Commodity Research at Geojit Financial Services)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.