Broader trend in gold to remain positive; dip in prices a good opportunity to buy

Navneet Damani

Every year, as Akshaya Tritiya approaches, the attention towards gold increases as it is an auspicious period to buy gold in India.  In that context, it is crucial to understand how gold prices are going to behave going ahead to make a better informed buying decision.

Gold has seen an uptrend in the recent months with prices in India up 4.5 percent so far this year owing to a range of factors that included political risks from Europe, geo-political tensions around North Korea and Donald Trump’s domestic policy-reform related issues.

While geo-political tensions can still crop up, political risks from Europe seem to have subsided considerably. After the Dutch elections, the French elections also seem to suggest that the anti-euro sentiment seems to have waned.

The first round of French elections saw the Centrist and pro-Euro candidate Emmanuel Macron leading the race and the far-right Le Pen coming second. Latest polls suggest that Macron would easily win in the second round due on May 7.

We have already seen risk sentiment improving post the result and safe-haven assets could take a beating in the coming days. This is a near-term risk to prices from a trading perspective.

The other factor that supported gold was uncertainty over Donald Trump’s economic and legislative policy agenda. Trump’s foreign policy has now become the main focus given the recent bombings in Syria and Afghanistan and sabre-rattling over North Korea.

It is unclear whether the current conflict will escalate but another round of nuclear testing could lead to a direct intervention in North Korea. Given the recent tilt towards foreign policy, questions have come up about Trump’s ability to introduce the big tax reforms and present a plan for infrastructure spending. Yet, this week could be decisive from the policy perspective as Trump has hinted about announcing tax reforms.

If we see major progress on his policy agenda, the reflation trade could be back and hit gold prices further. We, however, believe that passing major bills will be equally hard like what happened with the health care reform and wrangling over key reforms could be supportive for gold from a medium-term perspective.

In terms of US economic data, the first quarter has broadly seen mixed set of data and while growth is good, the pace isn’t scorching. US retail sales fell for a second straight month in March, falling 0.3 percent while consumer inflation fell for the first time in 13 months.

Surprisingly, this was the first month-on-month decline in inflation since 2010. On the labour market side, the US economy added 98,000 jobs in March, the lowest in 10 months and much lower than expectations of 180k. The unemployment rate, however, fell to 4.5 percent and wage growth remained healthy at 2.7 percent year-on-year. The estimates of Q1 GDP growth are also lower around 1.1 percent and data this week will give an exact reading about the growth and consumer spending in the first three months of 2017.

On the demand side, physical buying was weak across India and China in recent weeks. Gold premiums in India are around USD 1-2 an ounce. Chinese premiums are around USD 3.5 but have declined from USD 20 a couple of weeks ago. Indian demand could, however, pick up in India ahead of upcoming Akshaya Tritiya.

On the whole, we believe that even as the broader trend in gold remains positive, the current dip in prices could provide a good opportunity for investors to enter into the markets. From the Indian perspective, a stronger rupee has already kept local prices depressed and further dips will attract physical buying.  From the price perspective, levels between Rs 28000-28300 are good levels for buying and eventual targets over the course of this year could be in the range of Rs. 29500-30000.

(Author is Assistant Vice President- Research, Motilal Oswal Commodities Brokers)