BackGold prices benefit from geopolitical woes, up 6.5% this year
Analysts say the US rate hike in December and lack of clarity on US economic policies are key factors driving gold prices
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Mumbai: Precious metals are seeing a revival in demand among investors as gold prices continue to rally amid global economic uncertainties and geopolitical tensions. Gold prices have gained 6.5% year-to-date, having jumped 5% in January alone.
Analysts say the US rate hike in December and lack of clarity on US economic policies are key factors driving gold prices. “Concerns over the outcome of the French elections and uncertainty over Donald Trump’s foreign policy has kept gold and silver underpinned in recent days. Better US economic data is also helping the dollar uptrend to resume," Motilal Oswal said in a note.
The brokerage firm said any escalation in geopolitical tensions could provide an important turning point for gold, which could extend its gains.
Marine Le Pen, the leading presidential candidate in the French elections coming up in April-May, has proposed exiting the euro zone and re-denominating France’s national debt in francs, which analysts see as a huge potential risk to global market stability. Her victory could push ‘safe haven’ demand significantly higher and aid buying of gold and silver.
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In December, the last time the US Federal Reserve raised key interest rates, it triggered a gold buying spree among investors. Gold prices gained around 8% after US Fed chair Janet Yellen raised key interest rates by 25 basis points to between 0.50% and 0.75%. The rate hike was the first in a year (the last was in December 2015) and only the second since the 2007-2009 financial crisis.
Considered a ‘safe haven’ asset, the metal is sensitive to Fed rate hikes as it increases the opportunity cost of holding non-yielding bullion, while boosting the dollar.
How will a March rate hike impact gold?
Most commodity analysts believe a rate hike by the US Fed in March is unlikely. Although the Fed has indicated three rate hikes in 2017, analysts expect only two.
This is following a trend from last year when the Fed increased interest rates only once despite signalling four hikes. The Fed will hold its next interest rate meeting on 14-15 March.
Analysts said gold prices may continue to rally but there may be a bit of choppiness. T. Gnanasekar, director of Mumbai-based commodity and forex research firm Commtrendz Research, who expects the Fed to hold interest rates in March, sees some constraints in fresh buying of gold.
The market expects US President Donald Trump to reduce corporate taxes and emphasize infrastructure investment, pushing inflation higher. Higher interest rates will drive the dollar higher and act as a big headwind for gold, analysts said.
“The reflation trade played out in the immediate aftermath of Trump’s victory where the dollar and US bond yields surged and precious metals declined. A revival of this trade will weigh on precious metals this week. MCX gold is likely to dip but will hold supports near 28,550 levels. On the upside, 29,460/29,600 is a strong resistance area," Motilal Oswal said in its report.
Navneet Damani, associate vice-president, commodity research, Motilal Oswal Commodities expects a bout of correction in gold prices.
However, he is bullish on silver prices and is hoping for a 15% increase by the beginning of FY18.
Meanwhile, investment demand in exchange-traded funds (ETF) has started to pick up. SPDR ETF holdings saw an inflow for a second straight week with holdings up 18 tonnes last week. According to the World Gold Council report, 2016 was the second-best year for ETFs on record. Global demand for gold-backed ETFs and similar products was 531.9 tonnes, highest since 2009 but there was outflow in the fourth quarter.
Gold prices saw a good rally in 2016, climbing 8% but jewellery demand was at a seven-year low.
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