US-China trade concerns have been lingering over global markets since last year however gold failed to benefit as we saw a rush towards the US dollar.
It has been a fabulous year for gold so far as it has risen over 19 percent and tested the highest level in six years.
Gold in the international market hit a high of $1,555.07/oz, the highest level since April 2013. The notable development, however, is that gold has regained its status as a safe-haven asset.
US-China trade concerns have been lingering over global markets since last year however gold failed to benefit as we saw a rush towards the US dollar. Firmness in US and global equity market also reduced gold’s demand as an alternative asset
Trade tensions have intensified in last few months as both US and China have imposed import tariffs against each other while attempts at talks have failed to yield result. This along with slowdown in economic activity in major economies has been enough to cause a rush towards safe haven assets.
The latest push came in after China announced 5-10 percent import duty on $75 billion Chinese goods and US retaliated by increasing import tariffs on $550 billion goods by another 5 percent.
Gold has however not been the sole beneficiary of flight towards safe havens. The Japanese Yen has hit the highest level since November 2016 while US 10-year bond yield has slipped to lowest level since July 2016 lows.
Along with safe haven buying, gold has also benefitted from loose monetary policy stance of major central banks. Fed has already cut key lending rate by 0.25 percent and market expectations are high of further rate cut despite the central bank maintaining a non-committal stance. A spate of other central banks has also cut lending rates to boost growth.
Robust investor interest has also added to gold’s allure. Gold holdings with global ETF’s have risen by nearly 210 tonnes so far to stand near 2427 tonnes, the highest since March 2013.
With increasing global economic uncertainty, it is likely that we may see the upward momentum in gold continuing. However, it could be a tumultuous ride as we await more clarity in major issues. The key questions lingering at present is whether US-China will reach a trade deal, whether Fed will cut interest rate again, whether US economy may face another recession and whether Britain will exit European Union without a deal. Unless these questions are answered we are bound to see volatility in financial markets which could benefit safe havens like gold.
(The author is Head – Commodity Research at Kotak Securities.)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.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.