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Uptick in demand, lower prices to support gold in Sept: Quantum MF

With the sharp appreciation in the Indian currency on the back of foreign fund inflows and the absence of the RBI’s intervention, gold prices fell 2% in rupee terms during. Photo: BloombergPremium
With the sharp appreciation in the Indian currency on the back of foreign fund inflows and the absence of the RBI’s intervention, gold prices fell 2% in rupee terms during. Photo: Bloomberg

  • Investors should keep 10-15% allocation to gold as a diversification to many of the global problems that continue to persist and as a long-term store of value against a potential inflationary threat

The uptick in import shows gold demand may be starting to pick up, and the yellow metal is expected to get further support from lower prices, according to Chirag Mehta, senior fund manager—alternative investments, Quantum Mutual Fund.

After a flash crash to $1,720 per ounce at the start of August, triggered by positive economic data from the US, international gold prices settled with flat gains butabove $1,800 driven by a dovish US Federal Reserve, geopolitical risks and covid concerns.

The dollar strengthened due to the strong US jobs report for July that increased bets that the Fed could tighten policy earlier than expected. The report said non-farm payrolls rose much higher than expected 943,000 and the unemployment rate fell to 5.4% from 5.9% in June.

As a result, gold prices fell sharply. Post this setback, prices inched up through the rest of the month on concerns of rising Delta variant infections in the US and elsewhere.

However, with the sharp appreciation in the Indian currency on the back of foreign fund inflows and the absence of the RBI’s intervention, gold prices fell 2% in rupee terms during the month.

“While local demand was down earlier this year due to the second wave of covid-19, an uptick in imports shows gold demand may be starting to pick up. Domestic demand is set to rebound on lower prices, the festive season starting in September, and weddings pushed to this year from 2020. This should keep domestic gold prices well supported," Mehta wrote in a note.

In terms of global prices, the expert said that the flare-up in Afghanistan did not really impact gold prices.

“But the US's clumsy withdrawal from the country could have a longer-term impact on the US dollar and thus a positive impact on gold as it hurts US credibility and its role as a global superpower, which would only add to a growing list of structural headwinds for the dollar," he added.

Mehta maintained that investors should keep 10-15% allocation to gold as a diversification to many of the global problems that continue to persist and as a long-term store of value against a potential inflationary threat.

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