Gold prices to hit new high in current scenario? What will drive this safe haven ahead
3 min read 29 Mar 2023, 03:02 PM ISTExpert believes that the possibility of gold hitting a new high cannot be entirely ruled out as extreme speculation is at place, but, fundamentally, it appears value investors would prefer to stay away and wait for prices to stabilise.
PremiumGold prices plunged on Wednesday as easing in contagion worries in the banking system sparked bets for riskier assets and hence recorded low demand. At MCX, gold futures traded marginally lower and below ₹59,600. However, there is a high probability for gold to hit a new all-time high in the current run. There is a host of driving factors for this safe haven!
At the time of writing, at MCX, gold futures maturing April 5, traded at ₹58,955 down by ₹87 or 0.15%. This bullion ranged from ₹58,918 to ₹59,032 levels during the day.
While gold futures maturing June 5, traded at ₹59,594 --- lower by ₹140 or 0.23%. This commodity traded in the range of ₹59,417 to ₹59,643 levels.
MCX gold tracked the performance of international prices. Spot gold dipped by 0.3% to nearly $1,967.08. However, in early deals, spot gold shed to even below $1,960 mark and touched the day's low of $1,958.79. US gold futures also tumbled.
On the previous day, spot gold rallied by around 1%.
Gold has been on a rising spree this year due to bank turmoil, as equities recorded sharp selloff and demand for safe haven picked up.
Earlier this week, the epicenter of banks turmoil, Silicon Valley Bank was purchased by First Citizens Bank -- a primary subsidiary of North Carolina-based First Citizens BancShares. SVB was the first to fail and become the second largest bank failure in the US since the 2008 financial crisis. Hopes have escalated for the third largest bank failure, Signature Bank.
US Federal Reserve is reviewing the risks related to Silicon Valley Bank and what measures can be taken to prevent such failures.
Debajit Saha, lead analyst at Refinitiv Metals said, “The sudden rise in gold prices, primarily caused by the collapse of two regional banks in the US, and followed by the crisis in a Swiss bank and the Federal Reserve’s decision to raise the interest rate, has created a lot of speculation in the market that gold may hit a new high in the current run."
Saha believes that the possibility of gold hitting a new high cannot be entirely ruled out as extreme speculation is at place, but, fundamentally, it appears value investors would prefer to stay away and wait for prices to stabilise.
"We believe gold may settle around $1,875/oz in the next few weeks," Saha added.
Further, Vikram Dhawan Fund Manager - Commodities at Nippon India Mutual Fund said, "upside risks for Gold prices are stacking up, and Gold is now an even better hedge against probable credit or geopolitical events."
However, Nippon's fund manager did not rule out the vulnerability of the safe haven.
He said, "gold remains vulnerable to upside surprises in inflation, any undue tightness in money or credit markets, a pause in physical off-take in Asia, and a sustained shift in market sentiment towards risk-on mode."
Also, he pointed out that despite Gold prices at historic highs, it continues to be under-owned. Global ETF holdings are at almost 3 years' lows. Further, physical demand in Asia has waned due to the price spike.
Notably, central banks' gold demand in 2022 was at 55 year high. Dhawan said, "the demand continues to be steady in 2023 so far."
Historically, Dhawan said, "gold prices have benefitted from falling dollar bond yields and a softer dollar. The Fed pivot as and when it materialises will be a positive."
Nippon's fund manager highlighted key factors that could drive gold prices ahead. These are:
- Investor angst and anxiety in the global banking sector is for real.
- A full-blown banking crisis is not envisaged for now.
- However, anecdotal evidence suggests, unlike past crises, US Dollar is no longer the most preferred go-to haven, as observed in the Dollar Index moves.
- This creates a potential for much more significant global inflows into Gold than in past crises.
- That makes Gold open to a significant and longer up move in prices if another credit or a geopolitical event unfolds.
- Moreover, central banks across the globe may have to expand their balance sheets yet again to prevent another probable credit event. That in itself is bullish for Gold.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
