Spot gold prices have increased 7.2% to $1,137.67 per ounce so far in 2016. While that counts as a gain, prices had touched a high of $1,375.34 per ounce on 11 July during trading. The gold story can be split in two halves—prices rose consistently during the first half of 2016, before falling in the second half.
In the first half, conditions were not favourable for a rate hike by the US Federal Reserve and the dollar index was weakening, according to Jigar Trivedi, research analyst, commodities-fundamental, at Anand Rathi Commodities Ltd.
“There was strong demand for SPDR gold backed ETFs (exchange traded funds) in the first six months as economic data did not warrant a case for a rate hike, which led to a rally in gold prices,” Trivedi said.
However, towards the second half of the year, more hawkish indications from the Fed affected prices, said Lakshmi Iyer, chief investment officer, debt, and head of products, Kotak Mahindra AMC.
Typically, investor interest in gold is seen to wane when interest rates go higher.
Back home, gold did not glitter. Data from World Gold Council (WGC) shows consumer demand declined 39%, 18% and 28%, respectively, in the quarters to March, June and September. Higher prices wreaked havoc on investment demand.
Further, jewellers went on a strike following the imposition of a 1% excise duty on jewellery, announced in the budget on 29 February for 42 days. That adversely affected jewellery demand. Pressured rural incomes also hit rural gold demand. Another factor that adversely affected physical gold demand is the Sovereign Gold Bond Scheme,” said Iyer of Kotak.
“Perhaps the biggest factor affecting demand is the continued push towards regulation and accountability that the government is levelling at India’s economy in general, including the gold market,” pointed out the WGC report in November.
The outlook in the near term is lacklustre. The current quarter will show the adverse impact of demonetization on gold demand. Investors would do well to follow the developments in the coming budget regarding gold.
The US Fed has signalled more rate hikes in 2017; and if they happen, that’s not good news for prices. “The kind of guidance US President Trump gives markets will also be important. If he is not going to lead you to a very hawkish guidance, yields will start coming down and gold prices could rise,” said Iyer.