For more than a year now, gold as an asset class has failed to repeat its stellar performance of 2016.

In this calendar year so far, MCX gold has given rather unimpressive returns of 3%. Its international performance is worse. The yellow metal has posted negative returns so far in 2018—its price is down 7.31%. In sharp contrast, in 2017, gold prices surged 5% in local currency terms and 13% in dollar terms.

What is disappointing is that this safe-haven asset remains an underperformer in spite of the looming geopolitical risks globally. Further, commodity analysts expect gold to remain a laggard at least for the next six months.

So, what is stealing gold’s thunder?

A key factor that is robbing gold of its sheen is the slew of anticipated interest rate hikes by the US Federal Reserve this year. Given their inverse correlation, as interest rates rise, non-interest-yielding gold becomes less attractive for investors.

Improving American economic growth is expected to prompt the US central bank to raise rates next month, thus boosting the dollar. The Dollar Index recently surged to a 19-month high of 95.10 levels in June this year, possibly restricting the upmove in gold prices (see chart).

No wonder then that amid fears of global trade disputes and the ongoing currency crisis in Turkey, investors prefer to seek refuge in the dollar instead.

“Inflows into gold ETFs (exchange traded funds) have declined to their lowest level seen since December 2016 given the lack of demand for the yellow metal, especially from one of the key consumers—China. Domestically, we might see an uptick in gold demand buoyed by the upcoming festive season; however, sustaining higher prices looks difficult in the near term," said Sugandha Sachdeva, vice president (metals, energy and currency research) at Religare Securities Ltd.

“As for levels, we are looking at $1,172-1,160/oz (ounce) as a floor for international gold price. For domestic gold prices, they may consolidate for a while, but we see them rising to 31,400-31,500/10gm one year from now. On the downside, prices are unlikely to slip below 29,750-29,750/10gm," she added.

Meanwhile, the prospects for silver, which is more of an industrial metal than a precious one, aren’t any brighter. Analysts say that although gold is better placed than silver, bullion investors are unlikely to make quick gains in any of them.

In short, though the threat of a full-fledged trade war is still not completely out of the way, it is still seen as rhetoric and a negotiating tactic. Unless this risk significantly materializes, a sharp revival in gold prices in unlikely in the short term. So, for now, gold may have lost its safe-haven status to the dollar.

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