Money is gold, and nothing else," testified J.P. Morgan before the Congress way back in 1912. It’s a sentiment investors identify with, particularly in volatile markets. So it isn’t entirely surprising that gold prices rose to a six-month high last week, after worries about the economic outlook in the US caused volatility to soar to record levels. But the so-called safe haven support for the precious metal may have played its course, say some analysts. There is only so far prices can go, given the overall moderation in demand for the precious metal, and the continued quantitative tighten ing by the US Federal Reserve.

“There are some political uncertainties and global growth concerns that may aid gold prices, but we don’t think things have reached a boiling point yet for gold prices to spike very sharply and sustain," says Debajit Saha, senior precious metals analyst, Thomson Reuters GFMS in India.

Ritesh Jain, a global macro investor, suggests all asset prices, including those of gold, will likely be under pressure in 2019.

“Assets are about liquidity. The Fed’s rate hikes, coupled with quantitative tightening, will reduce dollar liquidity, and increase the value of dollar against all assets, including precious metals. This means the world will have to be prepared for a stronger dollar. Since the dollar and gold have an inverse relationship, it is more likely that the current strength in gold will reduce going ahead," he says.

“On an average for 2019, we see global gold prices at $1,285/ounce," says Saha. Currently, it is hovering around $1,278/oz.

In terms of average price expectations, Bank of America Merrill Lynch, too, has put its 2019 forecast for gold at $1,296/oz, which again isn’t too far from the current levels. But it added that the precious metal can peak at much higher levels during the course of the year. “A weaker dollar is a prerequisite for gold rally, and factors such as US twin deficits and Chinese stimulus could push gold to $1,400/oz high," it said in its global commodities outlook for 2019.

But, as in the past, any rally can be expected to be short-term. “Gold can be seen as a panic buy in the immediate aftermath of an extreme negative market shock. More gradual trends in stock markets–weekly or monthly losses–do not appear to elicit the same impulsive response from investors," Dirk G. Baur and Thomas K. McDermott said in a paper published in the Journal of Banking and Finance in 2010.

For gold to have a serious chance of an explosive rally, the Fed needs to stop raising rates or stop reducing its balance sheet, says Jain. Federal Reserve chairman Jerome Powell’s recent statements do not indicate any of this is on the cards, even though the markets are hoping there will be a pause as far as rate hikes go next year. Indeed, the rate hike cycle coupled with the Fed’s unwinding of its balance sheet this year have kept gold prices under check, despite all the uncertainty in global markets.

As Jain suggested, the strength in the dollar reflected in pressure on gold prices (see chart). Another factor that can keep the lid on gold prices is the moderation in demand. Thanks to the depreciation in the rupee, and the resulting high landed costs, demand for the precious metal fell in 2018. Demand in the first half of 2018 was the lowest since the 2009 crisis, the World Gold Council reported. While things recovered in the third quarter, it should be seen in light of a low base. “Given the moderate demand, we don’t see gold prices moving sharply," says Saha.

Even analysts who are bullish on gold prices are being measured with their targets. “We are marginally bullish on gold for the first quarter of 2019, as it is likely to find safe-haven support. As for levels, we are working with an upside target of $1,280-1,300/oz in the near-term," said Rajini Panicker Lamba, vice president, Phillip Commodities (India) Pvt. Ltd.

All told, the recent rally in gold prices looks like the proverbial flash in the pan. For the rally to sustain, the Fed will need to change its stance considerably.

Pallavi Pengonda contributed to this story

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