Home / Markets / Mark To Market /  Safe haven billing drives prices of gold to record highs, but makes it a risky bet

For panic-stricken investors, gold seems to be all that glitters. A combination of factors has worked in favour of the yellow metal, taking it to record highs last week.

Gold prices crossed $1,400 an ounce, the highest since September 2013. Investors have flocked to gold this year thanks to rising geopolitical tensions. As if the US-China trade war wasn’t enough, US-Iran tensions have escalated lately, too. Tensions between the US and Iran heightened on Thursday, when Iran’s Revolutionary Guard shot down a US surveillance drone.

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The dovish stance the US Federal Reserve took last week has added to the bullishness on gold. Investors are reading the central bank’s stance as a signal for a rate cut sooner rather than later.

“This (US-Iran tension) has likely stirred up investors’ appetite for the safe haven asset, adding to the uptrend in gold price that started in early May, even as the US Federal Reserve turns increasingly dovish and the US-China trade tensions prolong," pointed out Eun-Young Lee, an analyst at DBS Bank, in a report. Since 1 May, gold prices have gained around 9%.

The Fed’s dovish stance is a departure from earlier in the year, when some investors thought that quantitative tightening would mean gold prices would be under pressure. But now with interest rates expected to be lowered, demand for gold is likely to increase. Bond yields and gold are, after all, inversely correlated. Falling bond yields make non-interest bearing investments such as gold relatively more attractive for investors, as the opportunity cost of holding gold becomes lower.

To add to all this, demand from central banks has remained strong, driving overall gold demand up 7% in the January-March quarter this year, said the World Gold Council. In comparison, demand grew 4% in 2018.

Despite a number of positives for gold prices, some analysts remain cautious. “The sudden spike in gold prices is the result of speculative buying given the rise in global uncertainty," said Cameron Alexander, director of precious metals research at GFMS, Refinitiv. “Although gold has breached a key barrier of USD 1,365/oz, it will be a real challenge to cross and hold above USD 1,425-1,430/oz in the short term."

“We think that recent gold price surge seems overdone and high volatility for gold prices should not be welcomed by investors," said DBS’s Lee.

His average price forecast for the third quarter of 2019 now stands at $1,360/ounce.

Indeed, some analysts say the sharp rally in gold prices may warrant a look at its poorer cousin, silver.

“I’m more bullish on silver than gold," said Ritesh Jain, a global macro investor. “If gold is rising because of uncertainty, then silver lags, but if gold is outperforming because of the Fed rate cut expectation, then eventually silver will outperform gold."

Moreover, it helps that the gold to silver ratio (GSR) is currently at a multi-year high of 91.1, indicating that silver is undervalued compared to gold. GSR is a relative method of valuation arrived at by dividing the price of gold with that of silver. GSR is at its highest in nearly 25 years, according to Sugandha Sachdeva, vice-president and in charge of metals, energy and currency research at Religare Broking Ltd. “The signs for silver to perform are there. Silver, a relatively undervalued asset for the last few years, has been consolidating. Alongside, Fed’s inclination to cut rates after the last few years of being hawkish will entice buying interest in silver," she said.

However, for the optimism on gold and silver to play out, it is necessary that the US dollar doesn’t rally from here, said Jain. As things stand, markets believe that rate cuts are on the anvil sooner (July onwards) rather than later (September onwards).

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