Hareesh V
Spot gold crossed the psychological level of $1,500 an ounce in the international market, its highest level since May 2013.
Intensifying trade war tensions between the US and China, hopes of policy easing from major central banks and forecast of feeble global economic growth lifted the yellow metal’s traditional safe-haven appeal.
Unlike the international market, Indian futures prices set a new all-time high of Rs 38,000 per ten grams. Surging overseas prices coupled with weak INR pushed prices to record highs.
US decision to impose 10 percent tariffs on another $300 billion of Chinese goods starting from September 1 worsened the existing trade disputes between the world’s top two economies.
The US administration’s decision came just as both countries had resumed negotiations and this has diminished hopes of an immediate trade deal lifting gold’s safe-haven appeal.
However, following the new tariff decision, China allowed its currency to weaken to more than 7 yuan to USD as a retaliatory measure to curb the US imports. China effectively used the exchange rate as a weapon for imposing retaliatory tariffs on the US.
A weak currency makes Chinese exports more competitive and imports expensive. Markets are now worried about this currency war that poses a threat to the global economy giving an additional push to safe-haven assets.
Trade war between the world’s top two economies has dragged on for more than a year and a half, straining the global economy. Amid forecasts of weak global economic outlook, investors are now seeking shelter in safe-haven assets like gold.
Demand for gold as an inflation hedge is at its high level. US Fed cut interest rates by 25 basis points amid slowing economic growth.
With a view to scramble their economy from the US–China trade war fallout, central banks of India, New Zealand and Thailand cut interest rates this week. Lower rates push the demand for non-yielding gold like commodities.
The US greenback rallied to a two-year high but corrected sharply followed by a weak job and manufacturing numbers. Feeble economic data raised concerns of further policy easing by the US Federal Reserve that prompted investors to bet on safe investments like gold. Weak global equities and increased tensions in the Middle-East too aided the yellow metal.
A weak domestic currency and cues from the overseas market took domestic gold to record highs. Indian gold gained more than 20 percent since June this year.
MCX futures prices rallied for a fourth consecutive month and hit an all-time high of Rs 38,125 per ten grams this week. Meanwhile, physical demand seems moderated due to weak seasonal demand and high prices.
Waning global economic outlook amid increased trade and currency war tensions and elevating geopolitical worries continued to boost gold’s safe-haven demand.
On the price front, a mild correction may not be ruled out in the immediate run, but the trend remains positive and can target $1,570/1,640 an ounce.
On a later stage, even $2,000 an ounce is also possible. Anyhow the trend reversal point is seen at $1,365 an ounce.
A recovery in INR and feeble domestic demand possibly hit the local gold prices but it is unlikely to stay below Rs 34,000 per ten grams. Rs 41,800 would be the immediate upside obstacle and looking at the larger picture Rs 62,000 per ten grams may also be achievable.
The author is Head Commodity Research at Geojit Financial Services.
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