Gold: Will be back!!

Sugandha SachdevaReligare SecuritiesAfter a multi-year downtrend that began in 2011, the yellow metal has made a resounding comeback in 2016. Prices surged to more than two year highs and had the best first half in almost a decade, clocking returns of around 25 per cent. Faltering Chinese economy, gloomy global macro-economic environment, rising ETF demand, low interest rate policies of the major central banks and political and economic uncertainty caused by Brexit were the major drivers of gold prices in H1 2016. The extended sideways price action of the summer months has, however, given way to calamitous fall in the fourth quarter, after the stellar gains in the first half. So at first sight, the current landscape looks treacherous for gold prices in Q4 2016, with erosion of $1,300 per ounce support. However, this may not be the case for very long as it’s only the over-exuberance in prices that has just calmed down. Though the major risk to gold’s upwards trajectory is the US monetary tightening path and soaring dollar index, but does this mean that the bull run in gold is over?The answer is No!!After celebrating half year of prosperity, the metal is now witnessing a price-wise correction. However, this is just a breather and part of a healthy trend. There are still a host of factors which could pilot the prices towards brighter side and will set the theme going forward.The US rate hike The constant debate and grief surrounding the US rate hike has dented the sentiments for gold off late. However, the fact that path of monetary tightening by the Fed is going to be gradual is a positive factor for prices in the long run.While it is known that rising interest rates have a bearish effect on gold prices, as it increases the opportunity cost of holding gold, but other factors also play their part in driving prices even when interest rates tend to rise. Normally, prices react negatively to expectations of an imminent rate hike but after the rise in interest rates, they tend to bottom out and start to recover. Back in time, if we study the splendid bull market in gold that flourished during the 1970s, it has been observed that gold's run-up to its all-time high price of the 20th century happened even when interest rates were high and rapidly rising. Recalling the most recent trend, gold prices were pushed in to negative territory in 2015, amid concerns over the first rate hike in almost a decade but went on to record a momentous run in 2016, right after the Fed pulled the trigger in Dec’15.In present scenario also, with prices having already discounted one rate hike this year, the yellow metal is likely to embrace that and eventually garner buying interest.The US Presidential electionsThe political uncertainty surrounding the US Presidential elections is seen as the next big catalyst for prices after the British referendum 2016, which took the financial markets by surprise, but favored gold for its safe haven appeal. If Trump wins the Presidential elections, there will be noticeable changes in American politics. If he is elected, it will arouse uncertainty about the effects of his policies on the US economy .This can offer an upwards thrust to prices. The US Presidential race is a close call, where odds of Trump’s win may be underestimated by the polls, but only time can tell what’s in store.ETF and physical demandFollowing the above-average monsoon, we have the ongoing festival and upcoming wedding season and gold demand in India is expected to increase 11 percent in 2016-17 over the previous September to August crop season. This would help reverse weak second-quarter jewelry demand trend in India, as the current phase of correction would again attract buyers at lower levels.ETFs demand has remained strong and stole the show in H1 2016 as per the WGC, with inflows into the sector at 579.2 metric tons in the six-month period, compared with cumulative outflows of 616.1 metric tons over the preceding ten quarters. Price actionThe year 2016 began with glitter coming back to gold. A glance at the price chart shows the spark in the counter, which has reversed the market mood from slackness to zest. Base building at Rs.25,000 per 10gm/$1,045 per ounce on monthly charts suggests bullish undertone over long run and cyclical corrections can be construed as bargain hunt opportunities. Short-term trend may remain sluggish, which could exhaust and provide value buying near major support seen at Rs.28,500-28,300 per 10gm ($1,206-1,200 per ounce) levels. Prices are expected to consolidate for a while and then again bounce back towards Rs.31,500 per 10gm initially and sustained break of $1,390 per ounce or Rs.32,600 per 10gm mark will shift the gears for further rally towards $1,475 per ounce or Rs.33,500 per 10gm.