BackBucking trend, gold and Sensex rally equally despite North Korea crisis
Past data shows that Sensex and gold have an inverse relation, but the trend seems to have changed so far this year
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Mumbai: While Donald Trump is saying the US is “locked and loaded" for war with North Korea, Kim Jong-un’s regime is brandishing missiles and nuclear bombs. Developments such as these are usually sufficient to spook investors enough to dump stocks and go for gold. But that’s not how it’s playing out this time.
According to data provided by Bloomberg, this is the first time in at least nine years that both gold prices and stock markets have rallied almost equally in the same period. Past data shows that Sensex and gold have an inverse relation in the same period, but the trend seems to have changed this year.
Sample this: in 2017 so far, the Sensex jumped 19%, while gold prices gained 15.87% and silver was up 12%. In 2016, silver was the best asset class with gains of 14.86%, while gold was up 8.56% and the Sensex was up by marginally 1.95%, hit by demonetisation.
According to analysts, besides geopolitical factors, weak dollar index and interest rates hike odds by the Federal Reserve have also led to increase in gold prices, while abundant liquidity kept the stock markets rally alive.
“The dollar has slumped more than 9% from its highs this year which has kept gold prices supported despite the intermittent sell-offs. US economic data remains mixed while lack of major reforms by US President Donald Trump has kept the dollar depressed," said Kishore Narne, associate director, commodity and currency, Motilal Oswal Securities Ltd.
He said that US domestic political dysfunction has been another important driver this year. In 2017 so far, dollar index slumped 9.37% compared to a rise of 3.63% last year.
The dollar fell against its major currencies for six consecutive months in August following weaker-than-expected economic numbers and amid rising political uncertainty in Trump administration.
Most economic numbers released from the US were disappointing and continued to weigh on the greenback on higher levels. From US inflation to non-farm payrolls, numbers were disappointing, lowering prospects of Fed raising rates at its next meeting scheduled this September.
Prathamesh Mallya, chief analyst, non-agri commodities & currencies, Angel Commodities Broking, said though geopolitical crises have been at the helm of affairs since the start of the year but adding to that weak dollar and low inflation, poor non-farm payrolls data, impact of Hurricane Harvey, and fading chances for another Federal Reserve rate hike this year in the US are pushing gold prices to cross the $1,300 per ounce psychological mark.
He sees gold prices inching higher towards $1,360 mark if the crisis with regard to nuclear weapons by the Korean peninsula continues. “In the Indian markets, futures gold prices will move higher towards Rs30,500 per 10 grams," Mallya said.
Narne also expected the rally to extend towards $1,380-1,400 in the coming months.
“In the near term, the drama over US debt ceiling will provide a trigger. Silver could benefit from the rally in industrial metals as well but may underperform when purely risk aversion will drive markets. We believe that subdued inflation will prevent aggressive rate hikes and balance sheet normalization by central banks has the potential to stir up market volatility," he added.
However, Madhavi Mehta, an analyst at Kotak Commodity Services, said gold prices may see correction once the North Korea crisis subsides. She added that silver may underperform gold prices among precious metals.
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